Thursday, June 10, 2010

Monetary Policy Wrap-up 11 June 2010

In the past 48 hours we saw monetary policy decisions from New Zealand, Brazil, Europe, and UK. The New Zealand rate hike was as expected, the Brazilian one was too (though most probably didn't know it), the ECB and BoE non-decisions were also as expected. Following is a run down on each of the decisions and the current drivers of monetary policy in these four economies.

The chart above shows the path of the key policy rates for all of the central banks in question. The direction and magnitude of rates over the past couple of years should be no surprise to most, but this sets the scene for the following commentary.

Reserve Bank of New Zealand - increased 25bps to 2.75%
First up is the RBNZ, which raised the official cash rate to 2.75% from 2.50%, a move that was expected by most, and more or less flagged by the RBNZ in its previous monetary policy announcement. The RBNZ noted that the New Zealand economy is likely to expand 3.5% in the next two years on the back of export prices and volume growth, an improving labour market and a pick-up in residential and business investment.

The bank also noted that underlying CPI inflation is likely to track within its target range, even though headline inflation will be boosted by one-offs like the GST rate increase. The bank noted a possibility for a lower neutral policy rate in its announcement too:
“The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative to previous cycles.”
Banco Central do Brazil - increased 75bps to 10.25%
The Brazilian central bank added another meaty chunk to the Selic rate, lifting it 75bps to 10.25% (having lifted it another 75bps from 8.75% not long ago. This comes just a day after Brazil announced its economy grew 9% year on year in the first quarter this year (albeit off a low base comparator period). Thus the main driver of the recent monetary policy decisions by the Banco Central do Brazil are about tackling potential overheating. Here's the English announcement from the Banco:
"Continuing the adjustment process of the monetary conditions to the forward-looking scenario of the economy, in order to ensure the convergence of inflation to the targets path, the Copom unanimously decided to increase the Selic target to 10.25 percent, without bias."
European Central Bank - no change at 1.00%
The ECB left its main interest rate unchanged at 1%, and this probably wont change in the near term. The Eurozone is currently to caught up with sovereign debt crises and contagion risks to worry about inflation in the near term, indeed - if anything the next move could even be down as a last ditch effort if things went even more downhill. But even if things stabilise the recovery in the EU is going to be very gradual, fragile, and uneven - as previously noted in past analysis. The ECB announcement is always very thorough, the key paragraph is:
"Based on its regular economic and monetary analyses, the Governing Council decided to leave the key ECB interest rates unchanged. The current rates remain appropriate. Taking into account all the new information which has become available since our meeting on 6 May 2010, we continue to expect price developments to remain moderate over the policy-relevant medium-term horizon. Global inflationary pressures may persist, while domestic price pressures are expected to remain low. The latest information has also confirmed that the economic recovery in the euro area continued in the first half of 2010, but quarterly growth rates are likely to be rather uneven.

Looking ahead, we expect the euro area economy to grow at a moderate pace, in an environment of continued tensions in some financial market segments and of unusually high uncertainty. Our monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations remains of the essence."
Bank of England - no change at 0.50%
The Bank of England left the key policy rate at 0.50% and made no adjustments to the asset purchase program, leaving the limit at GBP 200 billion. The BoE is unlikely to do anything in the near term (similar to the ECB) as the UK economy muddles along out of recession. In fact fiscal policy tightening in both the UK and Europe may end up capping inflation pressures somewhat in the near term. The characteristically brief announcement was:
"The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion."
That's all for now. The main theme is that monetary policy stimulus withdrawal continues to be uneven, with different paces matching different prospects, and rightfully so as the global economy looks more and more uneven.

Econ Grapher Analytics
Reserve Bank of New Zealand
Banco Central do Brazil
European Central Bank
Bank of England

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