Thursday, April 8, 2010

BoE, ECB Hold Interest Rates

The Bank of England in the UK announced its decision on the 8th of April to hold interest rates at 0.50% and keep the asset purchase programme unchanged at GBP 200 billion.

Likewise the EU ECB announced a no-change at 1.00%. Both results were largely as expected and are probably appropriate for now. However one change was that the ECB announced further exits from some of the extraordinary policy moves taken to help prop up the normal functioning of credit and financial markets during the crisis:
"Regarding our collateral framework, the Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs).

In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets."
Back to the UK, the usual practice isn't to include any detailed commentary in their press releases, so a quick synopsis is due for the UK economy. The UK has an economy that depends to certain degree on its position as a financial centre; thus you can see that when the financial crisis hit, it took a toll on that sector (and others) of the economy. So you've got a large drop-off in growth, but at the same time inflation didn't come off that much. This is a tempting situation to call stagflation (i.e. high inflation and low/stagnant growth).

On the EU, the picture is much more complicated than the UK, for the EU there is a fragile and uneven recovery underway across the states that make up the EU. Some are doing well and others simply aren't, which makes for challenges in adjusting a single monetary policy.
"Benefiting from the ongoing recovery in the world economy, the significant macroeconomic stimulus provided and the measures adopted to restore the functioning of the banking system, the euro area economy grew by 0.4% in the third quarter of 2009, after a period of sharp decline, while in the fourth quarter real GDP was flat, according to Eurostat’s second release.

Available indicators, in particular further positive information from business surveys, suggest that the economic recovery in the euro area continued in the early months of 2010, although it may have been affected by a number of special factors, including adverse weather conditions. As a consequence, euro area real GDP growth is likely to have remained uneven around the turn of the year, making it advisable to look through the quarterly volatility and to compare growth developments on a half-yearly basis.

Looking ahead, the Governing Council expects real GDP growth to continue to expand at a moderate pace in 2010, owing to the ongoing process of balance sheet adjustment in various sectors and the expectation that low capacity utilisation is likely to dampen investment and that consumption is being hampered by weak labour market prospects."

Thus the situation remains for both the ECB and BoE that for now it is appropriate to keep rates on hold. But remember exit strategies. The economic recovery is underway, and eventually rates will need to be restored to neutral (well it's not mandatory but higher medium-long term inflation and higher risk taking -among other things- are the consequences of persistently low rates). But even with growing signs of recovery there are still notable upside and downside risks to the growth and inflation pictures; "We will continue to monitor very closely all developments over the period ahead."

Econ Grapher Analytics
Bank of England
European Central Bank

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