central bank watch

 Central Bank Watch

 
Written by: Christopher Vecchio and James Russell, DailyFX Research

Highlights of Latest Policy Meetings:

Federal Reserve

Concluding its meeting on December 16th, the Federal Open Market Committee held its federal funds target rate to a range between 0.00 percent and 0.25 percent.  With the hold on the benchmark and quantitative easing programs, the bank has shown its comfort in maintaining course while growth and inflation pressures slowly adjust to the global recovery in economic activity and financial conditions.  As for maintenance on its emergency programs, the Federal Reserve will continue towards its goal of purchasing $1.25 trillion of agency mortgage-backed securities and $175 billion of agency debt.  To provide a smooth transition to tighter policy in the future, the FOMC will slow the pace of asset purchases and plans to complete all such transactions by the end of the first quarter of 2010.  The Committee will evaluate “the timing and overall amounts of its purchases of securities” going forward in light of changing conditions in the financial markets and broader economy.

Economic activity since the November meeting has suggested a stronger economy as housing activity increases and labor market conditions improve.  The unemployment rate fell from a 16 year high while job losses posted their smallest decline since recession began.  Moving in tandem, personal spending increased 0.7% in October to beat expectations. Despite the gain, constrained weakness in labor and income growth, as well as tighter lending, remains a hindrance for economic output.  Going forward, the Committee anticipates that policy actions to stabilize the financial system as well as the extraordinary amount of fiscal and monetary stimulus will continue to strengthen the broad economy and support a return to “higher levels of resource utilization in a context of price stability.”  Core prices showed no change from October to November as slack in resources has limited price pressures. Given the minimal threat from inflation, the near-term outlook remains against the Federal Reserve turning hawkish in the foreseeable future.

FOMC Statements and Calendar at http://www.federalreserve.gov/FOMC/default.htm#calendars



European Central Bank

On January 14, 2009, the European Central Bank announced its decision to hold the key benchmark interest rate unchanged at 1.0 percent. Citing tempered inflation expectations in the medium-term and a recovery process that is “uneven” and shows “a great level of uncertainty,” the ECB found that the current rates remained appropriate.  Recent data shows that Euro-Zone consumer prices rose 0.3 percent during the month of December and 0.9 percent over the past year, well within the central bank’s annual inflation target of 2 percent.  Overall, the Euro-Zone economy has improved since the last ECB meeting in December, benefiting from a turn in the inventory cycle and a recovery in exports.  ECB President Jean-Claude Trichet also credits the “significant macroeconomic stimulus underway” and measures taken to stabilize the financial system.  The Euro-Zone economy expanded in the third quarter for the first time since the beginning of 2008, posting 0.4 percent growth thanks in a large part to improvement in industry.  Furthering optimism are consumer and business confidence indicators, which have each increased to levels not seen since 2008.  President Trichet is cautiously optimistic that the global economy, as well as foreign trade, may recover “more strongly than projected.”

Going forward, the ECB will likely maintain a dovish tone concerns that high unemployment and constrained consumers could hamper Europe’s economic recovery.  The unemployment rate unexpectedly rose to 10 percent in November, while household consumption fell 0.1 percent in the third quarter.  European consumers remain strapped by high unemployment and reduced household wealth as a result of the long recession.  Other concerns going forward, according to Trichet, are “renewed increases in oil and other commodity prices, the intensification of protection pressures, and the possibility of disruptive market movements related to the correction of global imbalances.”  Due to the significant hurdles that still stand in the way of a strong recovery and price stability in the near-term, the ECB remains poised to hold rates at exceptionally low levels through the first half of the year.

ECB news releases can be found at: http://www.ecb.eu/press/pressconf/2009/html/index.en.html



Bank of England

The Bank of England’s January 7, 2010 meeting resulted in vote to keep the key benchmark interest rate at 0.50 percent – the tenth consecutive month in which the rate has been maintained. Additionally, in an effort to ease trading by banks and dealers, the Bank of England’s Monetary Policy Committee announced it will begin to sell as many as £322.9 billion of corporate bonds. The corporate bonds will be first sold under the Asset Purchase Programme, which was held at its target of £200-billion Pounds as a result of the Monetary Policy Committee meeting. Although the move signals some level of comfort developing among MPC members, recession sentiment lingers as many British sectors remain dejected. Total Business Investment in the third quarter, relative to the previous year, was down 21.70 percent despite the M4 Money Supply showing growth for the previous five months following the central bank’s quantitative easing steps. Despite the fact that the Consumer Price Index inflation gauge for November indicated rising prices, Gross Domestic Product remained negative at 0.10 percent, and down 4.90 percent from the year previous, suggesting that expansionary monetary policy is still necessary.

Going forward, it appears likely that the Bank of England is ready to wind down its Asset Purchase Programme. Despite Industrial and Manufacturing Production both rebounding positive in the second-half of 2009, doubts remain of a protracted decline in overall output should the Bank of England raises rates too rapidly in the first half of 2010. With inflation forecasts steeped in the Monetary Policy Committee’s medium-term range, the near-term outlook remains that the Bank of England will continue quantitative easing at their next meeting on March 5, 2010, though hawkish sentiment may begin to accumulate thereafter.

BOE Statements can be found at: http://www.bankofengland.co.uk/monetarypolicy/decisions.htm



Swiss National Bank

As a result of its quarterly monetary policy assessment on December 10, 2009, the Swiss National Bank has decided to maintain its expansionary monetary policy for an indefinite period of time. Accordingly, the Governing Board announced that it would be holding the target range for the three-month Libor at 0.00 percent to 0.75 percent, with keeping the target rate in the lower end of this range at 0.25 percent The SNB will discontinue its purchases of Swiss franc bonds issued by private sector borrowers, an indication that the Governing Board believes the Swiss economy is on their desired recovery path. However, outlook remains trepid as “the upturn remains fragile and there is still considerable insecurity with regard to future developments.” In the third quarter of 2009, gross domestic product grew by 1.2 percent, after four consecutive quarters of sharp contraction. Growth was supported mainly by increases in Private Consumption, Investment, and Exports, which expanded by 2.3 percent, 14.1 percent and 10.8 percent in the third quarter, respectively.

Looking ahead, the Governing Board will be apprehensive to change rates until an economic recovery is well underway. With an expected decline in GDP of 1.5 percent for 2009, the SNB is currently forecasting GDP growth between 0.5 percent and 1.0 percent for 2010. Despite GDP growth in the third quarter, demand for labor continues to wane and unemployment will likely rise; recent data shows the current Unemployment Rate at 4.2 percent, and likely to continue the upward trend since July 2008.  The UBS consumption indicator gained to 1.276 in November, its first reading above 1.00 since December 2008, suggesting that the recent gains in consumer spending could help support growth in the near-term.  Furthermore, the SNB expects that exports remain positive as the global economy improves, and the Governing Board  announced it will aid exports by “[continuing] to act decisively to prevent any excessive appreciation of the Swiss franc against the euro.” In the next meeting, there exists only a small chance of a rate hike due to continued economic weakness and low inflation expectations; deflation persisted at 0.97 percent in the third quarter.

SNB Monetary Policy press releases can be found at: http://www.snb.ch/en



Reserve Bank of Australia

In a surprise move at its December 1st meeting, the Royal Bank of Australia raised its key overnight interest rate by 25 basis points to 3.75 percent. In Australia, where the economic downtown was relatively mild compared to other major global economies, the economic climate has rebounded faster than expected, leading Governor Glenn Stevens to believe further stimulus would be unnecessary. Growth is expected to continue throughout 2010 following a 0.2 percent expansion of gross domestic product in the third quarter, which marked the third consecutive quarter of positive growth for Australia. Inflation remains within the RBA’s desired range, as falling commodity prices at the end of 2008 and the beginning of 2009 led the moderation. Furthermore, according to Governor Stevens, the 21.4 percent rally the Australian dollar had against the U.S. dollar in 2009 “will have some impact in contraining prices for traded goods and services in [2010], and will dampen growth in the trade-exposed sector of the economy.” Nevertheless, in the Asian and Pacific economies where financials sectors were left unscathed relative to their Western counterparts, capital flow prospects remain strong.

Over the next year, the OECD is expecting the Australian economy to grow by 0.8 percent. Inflation remains a lower priority for the RBA, believing that “CPI and underlying inflation are expected to be consistent with the target in 2010.” Although consumer credit has suffered, the gradual recovery of the global economy is expected to bring stabilization and growth in household wealth. Private Sector Credit rebounded in the fourth quarter, expanding by 0.1 percent in November. Coupled with hawkish commentary from Governor Stevens suggesting that the RBA will slowly winddown the stimulus, improving credit and moderate inflation expectations suggest that another rate hike may be on the agenda for the RBA’s monetary policy meeting on Febuary 2, 2010.

RBA Statements on changes in monetary policy can be found at http://www.rba.gov.au/



Bank of Canada

On December 8, 2009, the Bank of Canada announced that it is maintaining its target for the overnight rate at 0.25 percent, its Bank Rate at 0.5 percent, and the deposit rate at 0.25 percent.  Ultimately this was an expected decision as economic activity has picked up since the last meeting and the global outlook has improved.  Conditions “in the first half of 2009 evolved largely as expected”, while policy makers signaled that recent global economic developments have been slightly more positive than its October assessment.  Support for their view includes rising asset prices, improvements in business and consumer confidence, and increased stability within the financial system.  Commodity prices have appreciated significantly since early July – helping to boost exports such as crude to more than $80 per barrel while copper and other metals have rallied more than twenty percent.  Indicators on the health of the economy have also improved as leading indicators rose 1.3 percent in November and manufacturing sales gained 2.0 percent in the month prior.  Other favorable signs have come from the housing market, where building permits rose by 18 percent in October, and in the jobs market as seen by unemployment falling to 8.5 percent in November.

Looking ahead, the central bank remains adamant in its projection that inflation will not return to the two percent target prior to the second half of 2011.  The BoC also reiterated its intention to hold the overnight rate constant through the end of the second quarter of 2010, so long as inflation pressures remain tamed.  Recent CPI data for November showed inflation grew 0.5 percent in November, but much of this move could be attributed to volatile energy prices.  Also of note, the Bank repeated its alarm that strength in the Canadian dollar could limit growth.  While actions may be taken to prevent this threat, the Loonie has largely settled into a range which may bode well for stability in trade.  Overall, the Bank’s cautious optimism and steady forecast for inflation levels are expected to result in no significant action in the next meeting, scheduled for January 19th.

BOC press releases on monetary policy changes can be found at http://www.bankofcanada.ca/en/monetary/target.html



Reserve Bank of New Zealand

At its most recent monetary policy meeting on December 10, 2009, the Reserve Bank of New Zealand left the Official Cash Rate unchanged at 2.50 percent.  The New Zealand economy continues to recover but there remains “considerable uncertainty about the durability of the expansion,” says Reserve Bank Governor Alan Bollard.  The domestic economy continues to recover, thanks to improved world growth, higher prices of commodity exports, and expanded government spending.  Housing prices have increased by over a full percent in the last twelve months, and consumer spending has shown signs of recovery as card spending increased by 0.8 percent in November.  New Zealand’s economy expanded for a second consecutive quarter as improving retail sales helped boost the national GDP by 0.2 percent in the third quarter.  Furthering notions of a recovery was business confidence rising to a 10-year high in December, although Governor Bollard states that “actual business spending remains weak” despite improvements in confidence.

Looking ahead, impediments to economic growth still remain and will keep policy makers reluctant to raise the 2.50 percent cash rate in the near-term.  The chief concern remains domestic consumption, which remains the primary driver of New Zealand’s growth.  The consumer has been battered in the past year by lower wages and an unemployment rate of six percent, a nine-year high for the nation.  In addition, Governor Bollard states that strength in the New Zealand Dollar, largely due to rising commodity prices, has “limited the scope for export to contribute to the recovery.”  However, if the economy continues to recover, policy makers may begin to remove monetary stimulus around the middle of 2010.  Inflationary concerns remain tepid (food prices have declined in the past four months), and financial conditions have improved, reducing the need for more immediate action.

RBNZ calendar of upcoming announcements can be found at http://www.rbnz.govt.nz/monpol/statements/0092224.html



Bank of Japan

At the recent Monetary Policy Meeting held December 18th, the Policy Board of the Bank of Japan decided, by unanimous vote, to keep the overnight call rate at around 0.10 percent.  In an unscheduled move, however, Bank officials decided to ease monetary policy further with the introduction of a new funding operation of three month loans expected to reach a maximum size of ten trillion yen.  Japan’s economy has shown improvement thanks to policy measures taken at home and abroad, but lacks sufficient strength to support a self-sustaining recovery in domestic private demand.  Some positive indicators for the Japanese economy include industrial production, which rose 2.6 percent to beat November expectations, as well as improvements in capacity utilization over the past few months.  However, the nation’s jobless rate rose to 5.2 percent in November and the official third quarter GDP reading was reduced from 1.2 percent to 0.3 percent, furthering concerns over the strength in Japan’s recovery.

Going forward, Bank officials project the pace of improvement in the Japanese economy to ‘remain moderate’ until the middle of 2010.  Thereafter, policy makers see Japan’s economic growth rate rising as improvements in the corporate sector (from increasing exports) spill over to the household sector.  An increase in the overnight call rate seems unlikely in the year ahead, however, due to precarious economic conditions and little to no concern over price pressures.   In fact deflation is the chief concern regarding prices as evidenced by a 1.1% drop in October core CPI, the largest such contraction since recording began in 1971.

BoJ calendar of monetary policy meetings can be found at http://www.boj.or.jp/en/theme/seisaku/kettei/index.htm

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