Central Bank Rate Changes in 2008

July 16, 2008

Central banks that have cut benchmark money rates in 2008, which include the Fed by 225 basis points, Canada by 125 bps and Bank of England by 50 bps, are clearly in the minority.  In these economies, like many others, economic growth has been weak, but inflation is much higher.  Policy in these economies is now stalemated.  Speculation about a Fed rate increase has faded, consistent with the subtitle of coverage on Chairman Bernanke’s gloomy remarks in today’s Wall Street Journal, “Testimony Suggests that Rate Increase Isn’t in the Cards.”  Meanwhile, the list of central banks that have raised rates to reduce inflation is far larger.  It includes the central banks in the Ukraine by 400 basis points, Romania by 250 bps, Iceland by 175 bps, Hungary by 150 bps, Brazil and Poland by 100 bps, Chile, Russia and Indonesia by 75 bps, Turkey, Sweden and Australia by 50 bps, Denmark by 35 bps, and Euroland, Sweden, Norway, the Czech Republic, Mexico, Thailand, and Taiwan by 25 basis points apiece.  Rates in China have not gone higher, but the PBOC there has tightened reserve requirements.  Korean rates have been steady too, but officials in Seoul recently signaled a readiness to increase them soon.  Japan’s key rate is only 0.5%, and officials there clearly worry more about slackening growth than accelerating inflation.  Finally, the New Zealand cash rate of 8.25% has been the highest of the OECD for the past year, and officials are now poised to start reducing them within a few months.

The case for Fed Policy standing apart from these others seems subject to challenge.  U.S. CPI inflation of 5.0% year-on-year in June was a full percentage point greater than ECB inflation of 4.0% despite better productivity growth.  U.S. GDP expanded only 0.9% saar in 1Q08 and compared unfavorably to increases of 2.8% in Euroland and 4.0% in Japan, but the situation flip-flopped in the second quarter.  Chances are mounting that real GDP contracted last quarter in both Euroland and Japan, while picking up in the United States to at least 2% and possibly 3%.  Comparatively accommodative monetary policy in the United States only partly explains why the dollar hit an all-time low yesterday of 1.6038 per euro and has weakened against the yen from 107.75 on July 7th to a low of 103.79 earlier today.  From highs of 0.8228/euro in October 2000 and Y 135.2 in March 2002 (and Y 124.14 as recently as June 2007), the dollar is in a huge multi-year swoon that has persevered despite several different business cycle juxtapositions between the United States and its G7 partners.  Put bluntly, investors have become much more worried about where the U.S. is heading than they were at the end of the last century. 



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