central bank watch

Central Bank Watch

 
Written by: Roman Kadinsky and James Russell, DailyFX Research

Highlights of Latest Policy Meetings:

Federal Reserve

Concluding its meeting on September 23, the Federal Open Market Committee held its federal funds target rate to a range between 0.00 percent to 0.25 percent for the sixth consecutive meeting while programs aimed at stabilizing housing and financial markets were extended into 2010.  The Federal Reserve stated that economic conditions will remain weak enough that low borrowing rates are necessary to assist growth going forward.  The Fed will follow through with its $1.25 trillion purchase of agency mortgage-back securities and $200 billion of agency debt, extending the programs until March 31, 2010.  These purchases will improve conditions in the credit markets and provide support to mortgage lending and the housing market.   However, in the statement that accompanied the official decision, the policy authority was careful to lay a firm timetable for reining in the unprecedented levels of financial stimulus. Stating its objective to “gradually slow the pace of these purchases” was not out of line with previous commitments; but anticipating their being “executed by the end of the first quarter” have finally put constraints on these ambiguous programs that have produced record deficits. 

Turning back to their underlying focus (growth), the statement noted household spending was stabilizing but could be constrained by poor job conditions, weak income growth, and tight credit.  Data confirms these concerns as spending appeared weak in August with durable goods orders unexpectedly falling 2.4 percent, while existing home sales and new home sales also disappointed after strong July gains.  The job market remains a concern as the unemployment rate is forecasted to rise to 9.8 percent through September, its highest level since 1983, and eventually top out at more than 10 percent over the coming months.  On a more positive note, however, August advance retail sales were up 2.7 percent and beat expectations, while the University of Michigan Confidence Survey rose to 73.5 in September, its highest reading since January 2008.   With the Fed looking to support the economic recovery and inflation expected to hold well below the bank’s target through the medium-term, the pressure to raise the federal funds will remain slack.  Price pressures were barely existent in the past two months as the CPI did not rise in July and increased a mere 0.4 percent in August.  The Fed’s stance in the months ahead is not likely to differ so long as the economy resumes a moderate level of growth and inflation fears remain subdued.

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



European Central Bank

In its August 2009 meeting, the European Central Bank kept its key interest rates unchanged. The refinancing rate and marginal lending facility rate were held at 1.00% and 1.75% respectively. ECB President Jean-Claude Trichet stated that expectations are for price levels to remain subdued, and that the ECB’s monetary stimulus would be “quickly unwound… once the macroeconomic environment improves.” Despite the tempered pace of recession through the second quarter (that has led many to believe there is a bottoming out of the euro zone economy), Trichet suggested economic recovery would likely be weak throughout 2009 before gradually gaining traction in 2010. Some encouraging data from August that likely left its impression on the central bank’s outlook includes the regional 2Q GDP release beating expectations by contracting a mere 0.1% in the second quarter. What’s more, that was framed by modest growth from both the French and German domestic numbers. Given the rebound in confidence from all levels of the economy, it isn’t difficult to see this stabilization develop into a revival. Although encouraged by such data, Trichet made clear that the ECB would be careful with policy rate changes and other central bank maneuvers because the data does “not mean at all that we don’t have a very bumpy road ahead of us.” He also rebutted criticism that the ECB was “behind the curve”, saying that the ECB would maintain a steady hand and would continue to make policy changes at a measured pace.

For the time being, the ECB believes that further fiscal stimulus is not warranted, and a forced exit strategy is unlikely in the near-term. The world economy still has major obstacles including expected deterioration of labor markets, increasing commodity prices, and protectionist pressures. In addition, the recent improvements in the world economy can be greatly attributed to a vast increase in government spending across the globe. Many fear that this is a temporary fix that will collapse if there are no accompanying improvements in private sector spending and the labor market. From an inflation perspective, the ECB has little reason to rush to a hawkish monetary stance. The ECB will likely keep rates low throughout the year, especially as inflation stays low. The Euro Zone CPI contracted 0.7% last month, worse than expectations and warning more of deflation than heavily positive inflation pressures. Indicators of inflation expectations remain “firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2 percent over the medium term,” Trichet says. The need for an easy monetary policy stance in the near-term is further supported by the deceleration in money and credit growth, as measured by the M3 and loans to the private sector. Although a low Euribor shows liquidity in the system, it has been difficult to filter available credit into the private sector. Trichet made it clear that banks need to act in this regard to help build and sustain confidence.

ECB news releases can be found at: http://www.ecb.eu/press/pressconf/2009/html/is090507.en.html



Bank of England


The Bank of England’s September 10th meeting resulted in a vote to maintain the official Bank rate at 0.50 percent, the sixth consecutive decision to hold the benchmark rate steady. More importantly, the Monetary Policy Committee refrained from increasing its £175 billion asset purchase program following a surprise decision to raise it by £50 billion in August which was beyond the initial cap laid out by the Chancellor of the Exchequer. While the bank made little comment on the meeting, the MPC expects quantitative easing to end in approximately two months with just under £30 billion in assets left to acquire. Economic data has offered glimpses of an upturn that may validate growth sentiment for the second half of the year. Nationwide confidence in August rose to the highest level in 14 months as housing shows signs of recovery. Loans for home purchases have continued to rise for the fourth month, while Hometrack’s survey on prices posted a gain in August for the first time in more than two years. Bottoming in this sector is vital towards wealth building which can stimulate spending that will be otherwise be deflated by stalled income growth and ongoing job losses. In this area too though, there are positive signs. The pace of layoffs has indeed moderated in recent months while consumer spending, evident in retail sales, has not fallen since May. Manufacturing has also recovered as industrial production in July rose for the second month.

While there are clear signs of improvement in the UK economy, uncertainty lingers on the sustainability of recent trends. The sheer momentum in unemployment has carried the jobless rate to a more than decade high through August. Also, concern over lending and financing remains a problem with consumer credit declining at a record pace in July while lending for housing posted a decline for the first time on records going back to 1993. In a recent speech before the Treasury Committee, BoE Governor Mervyn King stated that the consequences of the financial crisis “will be pervasive and long-lasting.” Further grim sentiment was raised by the Governor as he commented that cutting the deposit rate paid on holdings held by banks at the BoE would be considered a “useful supplement” to increase lending. Ultimately, there was no discussion of this topic during the meeting, despite widespread speculation for a possible cut to encourage lending. Talk of remuneration changes does not bode well for confidence in the MPC, as further monetary easing signals the Bank’s present programs have not been fully effective. Economic improvements will be keenly watched in September for signs of further growth as general improvements could lift lending without the need for monetary policy changes. While the central bank remained relatively dovish compared to its peers in Europe and the U.S., it is unlikely that any new action will be taken in the October 8 meeting.

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



Swiss National Bank

On September 17, 2009, the Swiss National Bank chose to maintain its expansionary policy stance by holding its target rate at 0.25 percent (with a range between 0.00 and 0.75 percent). This is the third quarterly meeting at which officials abstained from a change.  This loose policy should support the slow and as of yet unconfirmed economic recovery establish a solid foundation.  The global economy has shown improvement in recent months and the SNB has revised its own GDP growth forecast for the current year to a contraction of between 1.5 and 2 percent, less than previously projected.  The outlook for a recovery is already bolstering confidence. Switzerland’s economy contracted at a moderate 0.3 percent in the second quarter, significantly less than the expected 1.0 percent slump.  Among the more timely readings supporting positive growth were retail sales, which have exceeded expectations by rising 1.0 percent in the past year; and the KOF Swiss Leading Indicator’s climb to its highest reading since July 2008.

Going forward, the SNB will likely be slow in removing its monetary expansion as many pitfalls to an orderly recovery still exist.  Unemployment rose to 3.9 percent in October, while private consumption and investment remain especially weak.  The UBS consumption indicator fell to 0.658 in August, its lowest reading since 2003.  However, the SNB expects that exports will pick up as the global economy improves and that will subsequently help offset the short fall in domestic demand.  The SNB have (and will likely continue to) aid exports by intervening on behalf of the Swiss Franc to prevent appreciation that would make Swiss exports less appealing to foreign buyers.  In the next meeting, there exists only a small chance of a rate hike due to continued economic weakness and low inflation expectations.  In fact, negative inflation is expected in 2009 while under-utilized production capacity and steady energy prices should keep price pressures subdued going forward.

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



Reserve Bank of Australia

On October 6th, the Reserve Bank of Australia surprised economists and a considerable faction of the market by announcing a 25 basis point rate hike to 3.25 percent.  The rate hike was the Board’s first rate change since April and made Australia the first G-20 nation to raise borrowing costs since the start of the global financial crisis.  The rationale behind the decision included citations of stronger economic conditions in Australia as well as improvement in the economies of its Asian trading partners.  Domestically, A$22 billion of public infrastructure spending and A$20 billion in government cash handouts has provided spending support while private investment has been stronger than initially thought.  Increased spending and investment have helped improve economic performance in Australia.  In turn, the AiG Performance of Service increased from 48 to 49.3 in September and the AiG Performance of Construction increased to 50.8, its highest level since 2007.  Business conditions have shown improvement despite a decline in business borrowing as companies deleverage and lending standards toughen.  RBA Governor Glenn Stephens appears optimistic about credit markets, however, saying that “access to debt markets appears to be improving.”  Australia’s jobs outlook has also improved as the unemployment rate unexpectedly fell from 5.8 percent to 5.7 percent in September to contradict expectations of a rise to 6.0 percent. 

Further setting the Australian policy group apart from its peers, commentary and bank forecasts show a probability that the RBA will continue to raise rates in the coming years at a gradual pace.  Stephens believes that “the risk of serious economic contraction” in Australia has passed and there is no reason to be ‘timid’ in tightening policy since there was little hesitation in loosening the reins during the worst of the global crisis.  In addition, a more hawkish monetary stance will help ensure that prices remain within their targeted range going forward.  Inflation has been kept in check due to a moderation in labor costs and consistent commodity prices.  Governor Stevens offered an efficient summary of his assessment when he said, “With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.”  Assuming the Governor’s assumptions hold true, the Board should maintain a hawkish stance going forward.

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



Bank of Canada

On September 10, 2009, the Bank of Canada maintained its wait-and-see attitude by holding the overnight rate at 0.25% for the third consecutive meeting while deciding not to apply additional tools, such as quantitative easing, to spur recovery. Ultimately, this decision was fully expected; but the statement following the release proved more influential. Insight from the press release shows the central bank’s outlook improving. Conditions “in the first half of 2009 evolved largely as expected” while the group signaled second half growth may be “stronger than the Bank projected in July.” Support for their view includes rising commodity prices, improvements in confidence as well as financial conditions. Indeed commodity prices have appreciated since early July – helping to boost exports such as crude to near $70 per barrel while copper and other metals have rallied more than twenty percent. Indicator on economic health have also shown favorable signs as leading indicators climbed in July for the first time in eleven months while Ivey PMI showed expansion in the business sector for the third month in August. Other favorable signs came from the housing market where housing starts appeared to have bottomed out with the annualized figure for August at the highest pace in eight months. Similarly, the job market broke from its sync with the US by posting a gain of more than 27,000 new hires following losses of nearly 100,000 jobs in the past three months.

Looking ahead, the central bank remains adamant in its projection that inflation will not return to the two percent target prior to the second quarter 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 July echoes the call as core inflation fell to 1.8% with further downside likely as the Bank expects the figure to “trough in the current quarter.” 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 in the past two months 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 October 20th.

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 September 10, 2009, the Reserve Bank of New Zealand left the Official Cash Rate unchanged at 2.50 percent. The economic outlook remains weak in New Zealand but appears to be improving alongside the economies of New Zealand’s main trading partners. The most recent forecasts from the IMF project global contraction of 1.4 percent in 2009, followed by global growth of 2.5 percent in 2010. Signs point to New Zealand resuming growth towards the end of 2009 as potential exists for a rebound in household spending and residential investment. Other noteworthy milestones for a broader recovery are found in the NBNZ Business confidence indicator’s climb to a 10-year high of 34.2 in August and home sales’ steady year-over-year increase over the past six months. Unfortunately, New Zealand’s economic recovery will likely be slow and fragile as there remains a soft outlook for consumer spending, employment, and wages. Despite the nation’s trade activity, domestic consumption is still the primary driver for growth. Retail sales fell 0.5 percent in July, its largest such drop since January and well off expectations for a sales increase of 0.4 percent. In addition, unemployment rose to 6.0 percent in the second quarter, New Zealand’s highest unemployment rate since September 2000.

Renewed demand for New Zealand goods will be essential to economic recovery going forward. According to RBNZ Governor Alan Bollard, there is soft domestic demand of goods due to “weak income growth and a reduced appetite to take on debt” for households. Foreign demand of goods is also lacking due to the recent rise of the New Zealand dollar. Bollard states, “If the exchange rate were to continue its recent appreciation and/or the recovery in house prices were to undermine the improvement in household savings, then the sustainability of the present recovery will be brought into question.” The Official Cash Rate, which has been cut by 5.75 percentage points since July 2008, is therefore likely be kept low for the foreseeable future by these limiting growth forecasts as well as from a lack of inflationary pressures. The RBNZ 2-year inflation expectation is only 2.3 percent for the third quarter this year, compared with 3.0 percent for the third quarter of 2008. Price pressures have been limited by weak domestic demand. Food prices, for example, actually fell by 0.9 percent in August after rising 0.6 percent the month before.

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



Bank of Japan

At its most recent Monetary Policy Meeting held August 11th, the Policy Board of the Bank of Japan decided, by unanimous vote, to keep the overnight call rate at around 0.10 percent. While the economy is far from returning to a strong pace of expansion, officials believe that Japan’s record breaking recession has begun to ease thanks to a pickup in public investment, exports, and production. However, the world’s second largest economy still has a long recovery ahead of it. For the factory-led economy, business fixed investment is still on the decline, a reflection of weak corporate profits. Some progress has already been made in inventory adjustments, however a return to expansion will have to be supported by demand as stockpiles can grow only so much. Currently, demand is struggling from overseas markets and domestically. The jobless rate in July rose to a record 5.7 percent and household spending in July (year-over-year) fell an alarming 2.0 percent after a 0.2 percent rise the month before. Despite these lagging economic readings, the Policy Board expects the economy to pick up as of the latter half of 2009. Offering little support of its own, exports fell for a tenth consecutive month through July to a 36.5 percent contraction through the year ending in July.

On the political front, the Japanese August election brought the Democratic Party of Japan to power after almost 50 years of uninterrupted Liberal Democratic Party rule. This should not have a major impact on the Bank of Japan’s monetary policy, however, considering their supposed independence as the mutual desire to focus on supporting sustainable economic growth and stable price levels. Currently, deflation seems to once again casting its shadow over the economy. For the year, consumer prices fell 2.2 percent through July following the 1.8 percent pace the month before. Nonetheless, the focus remains on growth. BOJ Governor Masaaki Shirakawa says “the pace of improvement in the supply-demand balance is expected to be slow.” There are still numerous downside risks to the economy including severely depressed consumer spending and demand for Japanese products from abroad.

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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