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Policy Meetings in Focus as Slowing Economies Require Lower Rates

Policy Meetings in Focus as Slowing Economies Require Lower Rates

2011-09-05 04:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The month of August typically produces low market participation rates as many trading desks close for the summer months. Volatility may increase as the global economy teeters amid renewed fears of recession. Tensions in Europe are flaring up as a European envoy to Greece left the country after being dismissed when further austerity measures were suggested. In the United States, American lawmakers return from their hiatus as the economy failed to produce any jobs in August. With four rate decisions on tap, the coming week should add some transparency to policymakers’ though processes amid the recent global slowdown.

Reserve Bank of Australia Rate Decision: September 6 – 04:30 GMT

The Reserve Bank of Australia will hold its September meeting on Tuesday, where it is expected that the rate will be maintained at 4.75 percent. At the previous board meeting in August, the Reserve Bank of Australia decided to hold the rate steady at 4.75 percent, a level that has remained unchanged since November 2010. According to the Credit Suisse Overnight Index Swaps, there is a 25.0 percent chance of a 25-basis point rate hike at the central bank meeting on Tuesday. However, 113-basis points are being priced out over the next 12-months, indicating a cut in the rate is coming down the pipe.

On August 15, the Reserve Bank of Australia released the minutes from its August 2 meeting, which showed that any further tightening is on pause. “The case against tightening at this meeting was that the downside risks in demand had probably increased, as a result of the acute uncertainty in global financial markets. This in turn could…dampen the inflation outlook.” With global economic conditions deteriorating in the intermeeting period, the Reserve Bank of Australia’s sentiment will likely be similar; in fact, a more dovish tone would not be surprising. Join a DailyFX analyst for live coverage of event!

Bank of Canada Rate Decision: September 713:00 GMT

The Bank of Canada is widely expected to keep its rates on hold at 1.00 percent at its policy meeting on Tuesday, despite recent underlying economic indicators that show the economy is quickly slowing. A report issued this past Wednesday showed that the Canadian economy contracted by 0.4 percent in the second quarter, on an annualized pace. On the other hand, the Canadian labor market remains strong, with the unemployment rate falling 7.2 percent in July.

The Credit Suisse Overnight Index Swaps are pricing out 0.2-basis points over the next 12-months, and there is a miniscule 4.4 percent of a 25.0-basis point rate hike at Wednesday’s meeting. Given recent global developments and how they have affected the Canadian economy, I fully expect the Bank of Canada to employ a dovish tone at coming meeting. Join a DailyFX analyst for live coverage of event!

Bank of England Rate Decision: September 8 – 11:00 GMT

The Bank of England’s Monetary Policy Committee is expected to maintain its key benchmark rate at 0.5 percent at its meeting on Thursday, the thirty-first consecutive month at such a rate. The primary underlying reasonto maintain the rate continues to be the Monetary Policy Committee’s focus on economic growth rather than on reducing inflation, which ticked higher recently.The United Kingdom is facing an inflation rate of 4.4 percent as of July, more than double its target of 2 percent. Policymakers agree that the economy is not stable enough to withstand higher rates at the current time, given the eroding condition the housing and labor sectors. Traditionally, an inflation rate of this level would be a signal for the Monetary Policy Committee to increase the bank rate.

With economic recovery expected to be shaky in the short and medium-term, the Monetary Policy Committee will likely hold the bank rate at 0.5 percent through at least the end of 2011. The Overnight Index Swaps point towards the same conclusion, with a 0 percent chance of a rate hike expected at the meeting on Thursday, and 10.9-basis points priced out of the Sterling over the next 12-months.

European Central Bank Rate Decision: September 8 –11:45 GMT

The European Central Bank is expected to keep its key interest rate unchanged at 1.50 percent at its meeting on September 8. On August 4, the Governing Council of the European Central Bankmaintained the overnight rate at 1.50 percent.European Central Bank President Trichet said that the European Central Bank’s “monetary-policy stance remains accommodative,” even though inflation risks “remain on the upside.” However, with German growth slowing as well as a necessity for lower rates in the periphery countries, further rate hikes are unlikely in the coming months, in my opinion.

The Credit Suisse Overnight Index Swaps point to a similar conclusion. Currently, markets are suggesting that rates will be unchanged on Thursday, with a 0 percent change of a 25.0-basis point rate hike. Similarly, there are 26.0-basis points being priced out of the Euro for the next 12-months, signaling a potential rate cut in the future. Join a DailyFX analyst for live coverage of event!

German Consumer Price Index (YoY) (AUG F): September 9 – 06:00 GMT

On the initial release, the German consumer price index climbed as expected in August. As Jonathan Granby of DailyFX Research noted,“The annual figure climbed away from 2.3 percent in June to match the current 2011 and multi-year high, even as growth in the European Monetary Union’s largest economy begins to slow. The monthly reading marked the fastest rise for consumer prices since March and came in markedly higher than the recent string of near zero expansions as inflation accelerates again.

Since Germany is the Eurozone’s strongest and largest economy, this reading is closely watched by the European Central Bank as a determinant of their monetary policy decisions. Even though the report due on Friday is a revision of the initial reading, and it comes a day after the European Central Bank's policy meeting, the event could spark some price action early in the European trading session.

Rate Hike Probabilities / Basis Point Expectations (12-months)

Policy_Meetings_in_Focus_as_Slowing_Economies_Require_Lower_Rates_body_Picture_1.png, Policy Meetings in Focus as Slowing Economies Require Lower Rates

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

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