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Central Bank Watch: Focus on BOC Rate Decision; Fed Speakers Say Mon Pol Has Limits
12:50 04/21 (CEP News) â€“ The focus this week will shift back to the
Bank of Canada when it announces its interest rate decision on Tuesday.
Overnight indexed swaps are now 95% priced in for a 50 basis point cut.
In the U.S., there were several Fed speakers who said there are limits
to what monetary policy can accomplish.
CORRECTION: In a
previously posted version of this article, the implied probability of a
50 basis point rate cut from the Federal Reserve was incorrectly
listed. Fed fund futures are priced in for a 94% chance of a 25bp cut
on April 30, 6% chance of a hold and no chance of a 50 bp cut. CEP News
regrets the error.
U.S. Federal Reserve
Current Rate: 2.25%
Next Rate Decision: April 30
Expectation: 94% chance of a 25bp cut (Fed fund futures)
Last week was a busy one for Federal Reserve speakers, who covered
everything from monetary policy and economic outlook to the importance
of financial education and the need for the Fed to have greater
authority over discount window borrowers. As well, two Fed members
cautioned that there are limits to what monetary policy can accomplish.
On April 18, Philadelphia Fed President Charles Plosser warned against
expecting more from monetary policy than the Federal Reserve can
deliver. Plosser said he foresees markets resolving the current
problems on their own over time, and repeated that the target rate is
low enough to support growth. He noted that the public perception of
what monetary policy is capable of achieving has risen â€śconsiderablyâ€ť
over the years.
Along the same lines, Federal Reserve Governor Kevin Warsh (voter) said
rate cuts and liquidity injections are working to partially offset the
impact of the current market turmoil, but cautioned that there are
limits to what the Fedâ€™s monetary policy can accomplish and that a full
recovery is unlikely to be â€śswift or smooth.â€ť Speaking at the Global
Economic Forum in New York City, Warsh said an indication that market
function has returned will be when the Fedâ€™s supply of liquidity is
replaced by private liquidity.
Richmond Fed President Jeffrey Lacker said he expects the U.S. economy
to contract in the first half of 2008 and that he views inflation as
being too high and a problem. He also said he is "uncomfortable"
waiting for a slowdown to dampen inflation, as he is not convinced
inflation will moderate. Lacker declined to say if he would have
dissented on the rate vote had he still been a voting member.
Speaking at a credit conference in Charlotte, North Carolina on April
18, Boston Fed President Eric Rosengren said the Fed needs more
authority over firms that borrow from the discount window. â€śFor a
central bank to play an effective role during financial turmoil, it
needs to understand the sources of liquidity problems, the
interrelationships between market participants, likely losses, and
market participantsâ€™ potential reactions to these losses," he said.
On April 17, Dallas Fed President Richard Fisher, one of two Fed
dissenters in the last FOMC rate cut decision, said he has a â€śstrong
reluctanceâ€ť about further rate cuts. Fisher warned against "inflating
our way" out of the credit crisis and that further cuts may "compound
the bad." In a question and answer session, Fisher said he wants to
stabilize the economy but not by opening the monetary policy valve. He
also said that the Fed must provide a â€śbridgeâ€ť with liquidity measures
as opposed to just rate cuts.
Bank of Canada
Current Rate: 3.50%
Next Rate Decision: April 22
Expectation: 95% chance of a 50bp cut (OIS)
The Bank of Canada is the next major world central bank to deliver its
rate decision. Markets are now overwhelmingly expecting the BOC to cut
its key lending rate by 50 basis points when it meets on Tuesday.
According to Mark Frey, head trader at Custom House, traders are
anticipating some aggressive decisions from the BOC in coming months.
â€śThe six month USDCAD forward points have declined 14 basis points in
the last three sessions while the one year points have narrowed 26
basis points in the last four sessions,â€ť he noted. â€śIn short, the
market is now beginning to think that Mark Carney is going to be very
aggressive in providing monetary accommodation in relation to the U.S.
Federal Reserve, a fact that is weighing on USD-CAD interest rate
spreads and drastically altering the forward curve."
The bank now has some breathing room for additional cuts following
rather benign Canadian CPI inflation data for March. Both the headline
and core rates of inflation came in firmly below the Bank of Canadaâ€™s
Going against the market consensus, however, was the CD Howe
Instituteâ€™s shadow Monetary Policy Council, which on April 17 voted
that the BOC should tread cautiously at its next monetary policy
meeting and cut rates 25 basis points. The council notes that there
were sharp differences among members about the appropriate setting for
the overnight target rate, which currently sits at 3.50%. Seven of the
10 members argue for a reduction, two say the central bank should hold
the course and one recommends an increase.
On April 16, BOC Governor Mark Carney said Canadaâ€™s economy could
suffer from a marked decline in commodity prices, but noted he is also
taking into consideration the economyâ€™s strengths when setting monetary
policy. Speaking in an interview with the Business News Network, Carney
said, â€śThere's a variety of strengths in this economy. So we think
about terms of trade, commodity prices and other aspects. We also think
about the diversity of our economy and we obviously think about
relative strength in our largest trade partners.â€ť
Responding to a question about some forecasts for a drop in commodity
prices by as much as 20% to 30%, Carney said, â€śwhen commodity prices
slow they tend to slow fairly markedly, and the order of magnitude you
mention is not unreasonable."
During the G7 meetings in Washington, D.C. earlier this month, Carney
said Canada had been spared the worst of the financial market turmoil,
thanks to its solid economic foundation. Canadaâ€™s situation is not by
chance, he said. â€śItâ€™s because of some very strong fundamentals in our
On the morning of April 17, the Bank of Canada conducted another C$2.0
billion 28-day purchase and resale agreement (PRA) in an effort to
"support the efficient functioning of financial markets," drawing an
average yield of 3.091%. The last such operation took place on April 3,
when an identical operation drew an average yield of 3.35%. The high
yield was 3.15% while the low yield was 3.06%.
Earlier in the week, Former Quebec Premier Daniel Johnson was named to
the BOCâ€™s board of directors after being appointed by Finance Minister
Reserve Bank of Australia
Current Rate: 7.25%
Next Rate Decision: May 6
Expectation: Hold, 12% chance of a 25 bp hike
In the minutes from its April 1 monetary policy meeting, the Reserve
Bank of Australia acknowledged it expects inflation to remain high in
the short term but that recent tightening by the central bank has
helped cool the nation's economy. The minutes also showed that wage
growth was "reasonably contained" even though there were no signs of
the labour market slowing.
Earlier last week, RBA Governor Glenn Stevens said inflation in
Australia is a problem in the midst of being solved. "Inflation is
rising. It's a problem and needs to be dealt with," Stevens said at the
Australian National University in Canberra on April 14. "And the
policies in place will succeed in bringing it back down over time. It
will work." He added that it is important for the public to have
confidence in the bankâ€™s commitment to containing inflation.
European Central Bank
Current Rate: 4.00%
Next Rate Decision: May 8
Expectation: Hold, 3% chance of 25 bp cut (EONIA curve)
ECB Executive Board member Klaus Liebscher said that 3.6% inflation is
cause for concern and saw no room for rate cuts, but that rate hikes
were not out of the question. â€śWithout doubt this 3.6% is a very, very
worrying development and we must assume that we will have a relatively
high inflation rate, too high in my opinion for some months to come and
that we will only depart from this level in the final months of this
year,â€ť Liebscher said in an interview with Reuters. Suggesting the 2008
inflation would likely average close to 3.0%, Liebscher added that the
ECB makes decisions based on recent data.
In its monthly report published April 18, the Bank of Portugal said
that the European Central Bank was focused on price stability in the
medium term. â€śKeeping long-term inflation expectations firmly anchored
is the biggest priority,â€ť the Portuguese central bank added regarding
the ECB in its report.
Earlier in the week, Bundesbank President Axel Weber said that the
European Central Bank will act to ensure price stability and that while
the strong euro has helped dampen inflation, he saw rising global
inflation pressures. Weber, also a member of the European Central
Bankâ€™s Governing Council, said that the worst of the market turmoil
could be behind us and warned against exaggerating pessimism on the
Bank of England
Current Rate: 5.00%
Next Rate Decision: May 8
Expectation: Hold, 22% chance of 25bp cut (SONIA curve)
Charles Bean, the BOEâ€™s chief economist and member of its rate-setting
Monetary Policy Committee (MPC), said April 17 that the UK central bank
faces some tricky decisions in the months ahead as it faces a UK
housing slowdown, heightened short-term inflationary pressures and an
"especially uncertain economic outlook."
He said the MPC has more than just the credit crunch to contend with as
the UK's economic outlook remains "especially uncertain" and the
committee is "walking a tightrope.â€ť He noted the bank widened the range
of collateral accepted in the three-month repurchase operations.
Looking ahead, Bean said the UKâ€™s growth slowdown had been "relatively
modest so far." However, the BOE chief economist thinks it will likely
weaken through the year as the credit crunch and pressures on real
income manifest themselves fully.
On April 16, BOE Deputy Governor John Gieve said the bank will continue
pursuing means of liquidity easing and that the goal is to get the
mortgage market back on track.
Bank of Japan
Current Rate: 0.50%
Next Rate Decision: April 30
Expectation: Hold, 3% chance of 25% hike (OIS)
Bank of Japan minutes released earlier last week show the bankâ€™s
monetary policy committee members agreed to keep interest rates
unchanged even with economic growth projected to hit a plateau as risk
factors became increasingly apparent both at home and abroad. The nine
members reiterated the need to closely monitor increased downside risks
in Japan as a result of the intensifying slowdown in the U.S. They also
renewed their commitment to monitoring the downside risks to Japan due
to the surge in commodity prices.
At the G7 meeting held a week ago, newly-appointed BOJ governor Masaaki
Shirakawa said that while the financial market turmoil is ongoing,
there is little indication the crisis has had significant effects on
the real economy.
On April 18, Shirakawa promised to make the appropriate monetary policy
decisions to address global economic expectations for the economy to
slow in the near term. Nevertheless, he expects Japan to return to a
moderate rate of economic expansion.
By Stephen Huebl, [email protected], edited by Nancy Girgis,
[email protected] and Cristina Markham, [email protected]
(END) Â©CEP Newswires - Â©CEP News Ltd. 2008. All Rights Reserved. www.economicnews.ca
Related recent stories: (12:31 04/21) North American Summit to Focus on Trade, Security (12:14 04/21) Upward Risks to Prices Prevalent in Medium Term, Says ECBâ€™s Weber (11:58 04/21) Canada in Position to Post Deficit, Says Ratings Agency
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