This past week that saw three of the world's major central banks release interest rate decisions, all of which were in line with what markets had been expecting. The Bank of Japan and European Central Bank both held rates steady while the Bank of England eased by 25 bps to address downside risks to growth. Minutes from the FOMC's March 18 meeting were also released this week.
U.S. Federal Reserve
Current Rate: 2.25%
Next Rate Decision: April 30
Expectation: 72% chance of a 50bp cut
The major Federal Reserve release this week was the minutes from the Federal Open Market Committee's March 18 meeting, at which its members voted to cut interest rates by 75 bps. The minutes revealed several members saw a risk of a "prolonged and severe" downturn and that there had been "little indication" of stabilization in the U.S. housing market. Officials had concerns that price expectations might loosen and had discussed evidence of an "adverse feedback loop," the minutes showed.
It was also revealed that some members raised concerns about a precedent being sent on March 10 in regards to the Terms Securities Lending Facility (TSLF) operation and that the Fed recognizes rate policy alone can't solve the market problems. On March 18, the FOMC statement highlighted a further weakening of economic activity characterized by a slowdown in consumer spending and a softer labour market, as well as elevated inflation.
Following the release, RBC Capital Markets fixed income strategist TJ Marta said the minutes reflect increasing concerns that "stagflation-lite" could develop. "This would not be the stagflation of the '70's (double-digit inflation and very negative growth), but would rather be core inflation entrenched above 2% with prolonged, sub-trend growth," he wrote in a client note.
Fed Chairman Ben Bernanke said the Federal Reserve will examine guidance on capital and liquidity and that new regulations should insulate against financial market shocks. While he said it is difficult to make rule changes during periods of economic crisis, Bernanke said they "do not have the luxury of waiting for markets to stabilize first." He called the current economic crisis among the worst in post-war times, but stated the U.S. will not experience anything like the Great Depression. He also noted differences between the current situation and the one experienced by Japan in the 1990s, saying the U.S. entered this period of turmoil with more capital.
Also on Thursday, the Federal Reserve announced that it received only $33.95 billion for a $50 billion auction through the term securities lending facility. The absence of participants resulted in a bid-to-cover ratio of 0.68. This is much lower than the previous bid-to-cover ratios of 1.15 and 1.88 and could mean funding pressures have abated. The stop-out rate was 25 basis points � the minimum allowed rate.
Other speakers this week included Dallas Fed President Richard Fisher, who said the rate cuts delivered by the Federal Reserve have not been fully passed on to borrowers. Fisher said "breakdowns" in regulation contributed to the current crisis and that the economy continues to suffer from a "bout of anemia." He also said the crisis in the housing sector may not yet be over and that past experience shows asset prices "overreact" in busts.
Fed Governor Randall Kroszner said that in order to prevent more foreclosures, lenders should lower mortgage rates and reduce principal for borrowers whose home prices have dropped below their loan values. Testifying before the House Financial Services Panel on Wednesday, Kroszner urged Congress to move quickly to reconcile and enact Federal Housing Administration modernization legislation and said interest rate cuts alone were not enough to address the mortgage crisis in the U.S.
Many economists expect more easing from the Fed, a notion supported by the International Monetary Fund, which said in a World Economic Outlook report that more rate cuts could be necessary from the U.S. Federal Reserve. The IMF revised down growth expectations for the U.S. in 2008 to 0.5% from 1.5% forecast in January. For 2009, U.S. growth is expected at 0.6%.
Bank of Japan
Current Rate: 0.50%
Next Rate Decision: April 30
As expected, the Bank of Japan left its target for the overnight rate at 0.50%, citing slowing economic growth from cautious corporate and capital spending, and moderate increases in inflation.
The BOJ failed to mention previous statements highlighting expectations for the economy to experience moderate growth in the near term, saying rather that GDP will temporarily slow before resuming moderate expansion later in 2008. The bank also said it expects inflation to pick up and for consumer spending to remain firm, with the housing sector recovering.
Following the release of the bank's monetary policy report, the Japanese Upper House and Lower House approved acting head of the Bank of Japan Maasaki Shirakawa to maintain his current role, officially appointing him to a five-year term as governor of the BOJ. Shirakawa was supposed to assume one of the positions before the rejection of former Vice-Finance Minister Hiroshi Watanabe, who was denied the post as governor on fears of a conflict of interest from his prior position.
Bank of Canada
Current Rate: 3.50%
Next Rate Decision: April 22
Expectation: 77% chance of a 50bp cut
Bank of Canada Governor Mark Carney will be speaking Friday following the G7 meetings in Washington, D.C. at a press conference with Canadian Finance Minister Jim Flaherty.
There was little commentary from BOC officials this week aside from Deputy Governor David Longworth, who on Thursday said tight credit markets globally will continue "for some time to come". Speaking in Lake Louise, Alberta, he also said the Bank of Canada will likely cut interest rates soon to stimulate slowing economic growth. Longworth repeated the BOC's March 4 statement which stated that previously projected downside risks to Canada's economy were materializing and intensifying in some respects.
On Monday, the central bank will release its business outlook survey. BOC officials aren't expected to comment next week on monetary policy or economic outlook given the blackout period ahead of the April 22 rate decision.
European Central Bank
Current Rate: 4.00%
Next Rate Decision: May 8
Expectation: Hold, 8% chance of 25bp cut
The European Central Bank this week kept its refinancing rate at 4.00% as expected by markets. Following the decision, ECB President Jean-Claude Trichet noted the strong short-term upside inflation pressures as well as very vigorous money growth in the euro zone. Trichet also acknowledged the data outlining moderate real GDP growth and the "unusually high uncertainty" surrounding the economic outlook.
The ECB president emphasized that "medium-term price stability remains the primary objective" of the European Central Bank, adding that the central bank "remains committed to preventing second round effects" and "will monitor very closely all developments".
In the Q&A period, Trichet said he "deplored" excessive volatility in exchange rates and was observing "with great attention and interest" the U.S. Treasury's USD commitments. Trichet reiterated the ECB's mandate to deliver price stability in the medium term and that it will continue to do what is necessary to ensure this.
"(The) ECB statement confirms that an ECB cut before the summer break has become highly unlikely even if the euro stays strong and the US Fed and the BoE reduce their own interest rates further," noted Holger Schmieding from Bank of America. "The ECB is clearly pleased with the result of its two-pronged approach, namely to inject liquidity into the money markets on generous terms when needed while keeping rates on hold."
Ahead of the bank's rate decisions on Thursday, the International Monetary Fund said in its April 2008 report that both the BOE and ECB have room for some rate cuts. For the euro zone, the IMF is revising down its estimates for growth to 1.4% from 1.6% in 2008. It also trimmed down its forecasts for euro zone GDP in 2009, predicting the economy to grow by 1.2% instead of 1.9% as previously forecast.
Speaking ahead of the G7 meetings in Washington, D.C. Friday, Bundesbank President Axel Weber said there is no room for the European Central Bank to cut interest rates and that the ECB would need to act if inflation risks materialize. Weber said the ECB will not tolerate broad price pressures, adding that inflation, driven by food prices, may have peaked in March. However, Weber also said that euro area price levels were likely to say high for most of the year and that he didn't agree with the International Monetary Fund's "modest" inflation estimate.
There will be plenty more ECB speakers next week, including Trichet, who is scheduled to speak in New York on Monday and again on Tuesday in Frankfurt alongside Governing Council member Axel Weber. Other speakers include: the Euro Group's Jean-Claude Juncker, EU Economic and Monetary Affairs Commissioner Joaquin Almunia, European Central Bank Vice President Lucas Papademos and ECB Executive Board Member Gertrude Tumpel-Gugerell.
Bank of England
Current Rate: 5.00%
Next Rate Decision: May 8
Expectation: Hold, 18% chance of 25bp cut
The Bank of England's Monetary Policy Committee decided on Thursday to cut the UK's April benchmark interest rate by 25 basis points to 5.00%, as had been expected by economists.
In an accompanying statement, the MPC said the circumstances merited a rate cut, even though inflation concerns persist and have not taken a back seat. The committee noted that CPI inflation rose to 2.5% in February and expects it to rise further over 2008, reflecting the continuing impact of higher energy and food prices as well as the recent depreciation of the sterling on import costs.
There has been a fair amount of market commentary surrounding the BOE's rate decision and where its monetary policy is likely to go in the coming months. Some economists believe the bank will have to cut more aggressively to counter the downside risks to growth, while others say the central bank will remain on hold until at least the summer given the concerns the MPC has already expressed about high inflation.
Earlier in the week, the Bank of England's offer of �11 billion in a weekly open market operation (OMO) via an auction received bids to the tune of �27 billion. The more than double oversubscription of the auction meant that only 40% of �27 billion bids would be allocated proportionally, a spokesperson said.
Reserve Bank of Australia
Current Rate: 7.25%
Next Rate Decision: May 6
Expectation: Hold, 10% chance of 25bp rate hike
It was a quiet week for news related to the Reserve Bank of Australia. Looking ahead to next week, the minutes from the RBA's April meeting will be released Monday evening (EDT), providing observers with details on the deliberations behind the decision to hold rates. At the same time, RBA Governor Glenn Stevens will deliver a speech entitled �Liquidity and the Lender of Last Resort'.
By Stephen Huebl and edited by Nancy Girgis