Thursday's Triple Central Banking Feature

June 2, 2009

The Bank of England (11:00 GMT), ECB (11:45 GMT) and Bank of Canada (13:00 GMT) unveil credit policy decisions on Thursday.  Policymakers at these central banks have much in common: low policy rates already, deep recessions, and falling inflation. 

The Bank of England rate is at 0.5%. Officials have signaled such will not be reduced further and have shifted policy to quantitative easing, to wit a program of asset purchases that began in March with a commitment to buy Gbp 75 billion worth and was augmented in May with a pledge to do an additional Gbp 50 billion.  The suspenseful element of the BOE announcement concerns whether the grand sum of Gbp 125 billion gets increased again.  Lately, officials have surprised markets by erring on the side of being aggressive in supporting growth.  British real GDP contracted at a 7.3% annualized rate (saar) last quarter.  CPI inflation has declined from 3.0% a year ago to 2.3% now, which still exceeds target but appears headed for a substantial further drop.  The pound since the last Bank of England meeting has appreciated 9.8% against the dollar and about 5% on a trade-weighted basis.

The ECB refinancing rate and marginal lending rates were sliced 25 basis points in May to 1.0% and1.75%, while the deposit rate was left at 0.25%.  ECB officials unveiled a plan to purchase EUR 60 billion of covered bonds, with details to be revealed after this week’s meeting.  The ECB moves slowly and appears split over how to proceed from here.  The ECB has been less forceful than other central banks but justifies its behavior by citing different institutional circumstances like a more responsive network of automatic business cycle stabilizers. An expansion beyond the EUR 60 billion would surprise markets, and a rate cut would create even greater shock even though President Trichet denied any decision against further cuts regardless of what happens.  Officials nonetheless are uneasy about taking rates lower and certainly would not do so after a month when signs emerged that the recession may be softening not only globally but also regionally.  Euroland GDP fell 9.8% saar in the first quarter, and CPI inflation has dropped to zero from 2.4% a year ago.  A highlight of the ECB press conference beginning at 12:30 GMT on Thursday will be the scheduled unveiling of new quarterly growth and price forecasts.  The 2009 range for GDP growth projected in March was cut from -1.0/0.0% to minus 3.2% to minus 2.2%, and even that now looks far too optimistic.  Private analysts are now forecasting a decline of around 4%.  The range for growth in 2010 had been centered on zero.  It’s unclear how or even if such will get revised, too. As for CPI inflation, the ranges predicted three months ago were 0.1-0.7% for 2009, which already exceeds the current level and 0.6-1.4% for 2010.  The euro has advanced 7.5% against the dollar since the May ECB meeting; however, oil prices have soared 21.5%.

The Bank of Canada pre-announced monetary policy through mid-2010 at its last meeting in April.  Subject to the condition that inflation behaves as officials expect, the overnight target rate will not be changed from its present 0.25%.  In April, such was cut in half to the level.  That was the tenth reduction overall from a cyclical peak of 4.5% prior to December 2007 and the sixth since last October.  Canadian real GDP contracted 5.4% saar in the first quarter, and CPI inflation has dropped to 0.4% from 1.7% a year ago.  The Canadian dollar has advanced 14.4% against its U.S. counterpart since Bank of Canada officials last met on April 21st, which seemingly paves the way for inflation to dip under zero for a while.  Unlike the ECB and Bank of England, not to mention the Fed, Canadian officials have resisted quantitative easing even in a virtual, if not actual, way. The hope is that such a step should not prove necessary because of the substantial cut already in interest rates, a more stimulative fiscal policy, improving world economic and financial conditions, and the unusual conditional promise not to begin raising interest rates for at least an entire year from now.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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