More Likely Central Bank Rate Cuts on Tap for Thursday

December 10, 2008

Several central banks have announced large rate cuts already this month, including moves of 50 basis points in Hungary, 75 basis points in Canada and Euroland, 100 basis points in Vietnam, Australia, India, Thailand and Britain, and 150 basis points in New Zealand.  Four central banks are likely to ease tomorrow, each by about 50 basis points.

First up will be the Bank of Korea. In early August the Korean benchmark was raised by 25 basis points to 5.25%. That move was reversed two months later and followed by additional rate reductions of 75 bps on October 27 and 25 bps to 4.0% on November 7. PPI inflation in South Korea has fallen from 11.3% on-year in September to 7.8% now. On-year employment growth is at a 5-year low.

Taiwan’s central bank implemented its last rate hike, a move of just 12.5 basis points to a discount rate of 3.625% in late June, then reversed that move in late September, cut twice in October by 25 basis points each, and made a third rate cut of 25 bps to 2.75% last month. As elsewhere, Taiwan is experiencing shrinking growth in external and domestic demand as well as lessening inflation.

The Reserve Bank of South Africa raised its repo rate by 50 basis points in April and again in June to 12.0%. Retail sales have recorded six consecutive on-year drops. Consumer price inflation of 12.4% remains far above the target ceiling of 6%, but the outlook points to a substantial decline in price pressure. A majority of analysts expect the first rate cut of an easing cycle to be announced tomorrow.

The Swiss National Bank implemented three rate cuts already from a peak target of 2.75% for three-month Libor. The first of these on October 8th was just 25 basis points and coordinated with several other central bank easing moves including the Fed, Bank of England and ECB. The second, a drop of 50 bps, matched the ECB’s cut of same amount on November 6, and a third move of 100 basis points was announced on November 20th. That third move was accompanied by a statement that left the door open to more near-term reductions and predicted that sub-target inflation might arrive before yearend. While much of Europe is in a recession, Switzerland appears to be on the brink of one. GDP was unchanged in the third quarter, which cut on-year growth to 1.6% from 2.6% in the second quarter.



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