Â·US Fed willing
to resort to unconventional monetary policy measures
Â·ECB, BoE and
Swedish Riksbank make further interest rate cuts
Â·Pound falls to
new lows, burdened by aggressive easing
week has brought bad news on the economic front, especially from the US,
but the main focus has been on further interest rate cuts. Central banks in
industrialized countries are lowering their key interest rates drastically in
an attempt to combat the constraints in financial markets and improve financing
conditions for companies and private households. On Wednesday night, the Reserve
Bank of New Zealand
cut interest rates by 150bp to 5%; the Swedish Riksbank followed suit
on Thursday morning by slashing interest rates by 175 bp to 2%. Then at ,
the Bank of England lowered the bank rate by 100 bp to 2%, and finally, half an
hour later, the ECB cut the refi rate by 75 bp to 2.5%.
central banks which no longer have much scope to cut interest rates are taking
action too: at the beginning of the week, the Bank of Japan agreed in an
extraordinary meeting to accept lower-rated corporate bonds and loans as
eligible collateral. But a particularly striking announcement came from the
Fed: Fed chairman Ben Bernanke indicated that, as well as using conventional interest
rate policies to support the economy, the Fed was also willing to resort to
unconventional measures. He was referring on the one hand to measures open to
the Fed to influence longer-term interest rates, such as purchasing long-term
Treasuries or committing itself to keeping interest rates low. But on the other
hand there was also the option of â€śinterveningâ€ť in certain market sectors to
improve market conditions for investors and issuers. In this connection, he pointed
out recent measures like the purchase of securities and MBS issued by
government sponsored mortgage lenders such as Fannie Mae and Freddie Mac, and
the facility for purchasing ABS collateralized by consumer loans.
ECB did cut key interest rates by a further 75 basis points, which was more or
less what markets were expecting. But whereas the Fed is pulling out all the
stops, the ECB seems hesitant and indecisive. The ECB staff
growth projection forecasts distinctly weak demand until well into the year
2010, but the Governing Council sees inflation risks as being â€śmore balanced
than in the
pastâ€ť, i.e.: not yet balanced. And at the press conference, ECB president
Jean-Claude Trichet made no mention whatever of future monetary policy
intentions, pointing out instead that by cutting interest rates by a total of
175 bp within a few weeks, a lot had been done already. Furthermore, he said
the Council had â€śreached the decision to reduce interest rates by 75 bp by
consensusâ€ť, which suggests that some Council members might have been happier
with a more leisurely pace. In a newspaper interview after the meeting, ECB
Governing Council member Yves Mersch, for instance, stated that rates would not
be cut by such big amounts in the future.
view of the indecisive signals from the ECB and the long rally beforehand, bond
and money markets have corrected since the meeting. The interest rate
differential between the eurozone and the US,
where interest rates are expected to be cut to 0.5% on 16 December, has widened.
This has boosted the euro: EUR-USD rose over 1.28 temporarily. However, we are
expecting the rate cut process in the eurozone to continue. German industrial
new orders plummeted again â€“ they are now over 17% below last yearâ€™s level; but
this is only one of many signs that the eurozone is falling deeper into
recession. The ECB will be forced to take further action sooner rather than
later. We therefore expect EUR-USD to move back into the lower end of the
trading range of the last few weeks shortly.
same action taken by two different organizations, does not necessarily have the
same effect. The
forex market seems to be rating the US Fedâ€™s extremely expansive monetary
policy much higher than comparable efforts made by the BoE. In the space of
less than two months, the UK
central bank has cut key interest rates by 300 basis points to 2%, signalled
that further cuts are on the cards, and indicated possible cooperation with the
Treasury, i.e: quantitative easing by means of direct purchase of government
bonds. At any rate, the forex marketâ€™s reaction to all this was somewhat
allergic: cable fell below 1.45 at times, EUR-GBP rose to a new high of 0.8726.
With regard to EUR-GBP in particular, we see further risks ahead.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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