With central banks dishing out rate decisions left and right, it’s easy for a homie to get lost in all the ruckus. Lucky for you, you’ve got your brotha from anotha motha, Forex Gump, to break everything down for you!
The Reserve Bank of Australia (RBA)
To keep interest rates at 4.75%.
Uncertainty, uncertainty, uncertainty! The RBA believes that there’s just too much uncertainty surrounding the outlook for growth, both domestically and globally, to raise rates at this point in time. It’s for this reason that the central bank decided to sit on its hands even though inflation recently spiked up to 3.6%, well above the RBA’s target range of 2% to 3%.
Australians have been unwilling to spend as of late, as evidenced by declining consumer spending. For the first time since 2009, retail sales posted back-to-back monthly declines: a 0.6% drop in June and a 0.1% slide in July.
Furthermore, property prices and business and household borrowing have been flat at best, and they’d probably suffer further if the RBA were to increase interest rates.
The markets are pricing in up to two rate cuts over the next twelve months even though the RBA admits there is pressure to increase rates to stem rising inflation.
The Swiss National Bank (SNB)
A surprise announcement to cut interest rates from 0.25% to “as close to 0% as possible” and increase money supply.
In one of last week’s biggest shockers, the SNB acted to stop the Swiss franc‘s rise by suddenly loosening its monetary policy. As you all know, the franc has recently been on the receiving end of safe haven flows brought about by the euro zone and U.S’s debt problems.
The SNB considers its currency overvalued, claiming that it’s threatening price stability in Switzerland and giving exporters a hard time. It also expressed concern over the deteriorated outlook for the Swiss economy.
Clearly, the central bank’s move was based heavily on the franc’s out-of-this-world appreciation. This makes it logical to assume that the SNB won’t consider tightening until buying pressure on the franc eases or global uncertainty fades… but those are two conditions that are unlikely to be met anytime soon.
The Bank of Japan (BOJ)
To keep interest rates between 0% and 0.10% and expand asset buying program by 10 trillion JPY.
Following in the footsteps of the SNB, the BOJ acted to weaken the yen even further by easing monetary policy after its direct market intervention. The BOJ’s move to increase its asset buying program serves a double purpose.
First, the central bank believes its recent market intervention to weaken the yen will be more effective if coupled with monetary policy. As such, market players would have even more reason to short the powerhouse yen. Second, adopting a more accommodative monetary policy will help it transition smoothly from a recovery phase to a sustainable growth path.
Though I don’t expect any changes to be made anytime soon, the next move from the BOJ will more likely be to ease policy further rather than tighten it.
The Bank of England (BOE)
To keep interest rates at 0.50% and its asset purchase facility at 200 billion GBP.
The U.K. economy is on very shaky ground, as shown by the pitiful 0.2% growth in Q2 2011. Weak consumer spending, when mixed with the government’s austerity measures, makes for a deadly brew for economic growth. Throw an ill-timed rate hike into the mix and who knows what sort of poison you’ll end up with.
Also, inflation has softened from its high of 4.5% to 4.2% and inflation expectations have been falling as well. This has somewhat eased pressure for the BOE to act and raise rates.
Interest rates will probably be chillin’ like a villain at current levels until the early months of 2012, though there is a risk of further quantitative easing if the economy fails to pick up steam.
The European Central Bank (ECB)
To keep interest rates at 1.50% and buy more government bonds.
The ECB is a copycat! Just kidding. It used the same excuse as the RBA, citing economic uncertainty as its primary reason to maintain an “accommodative monetary policy.” Though the euro zone is undergoing moderate expansion, the central bank wants to take the safe route as the economy is operating under a high level of uncertainty. Its plan to load up on government bonds stems from its desire to reinforce market stability and quell debt contagion fears.
Though ECB President Jean-Claude Trichet said the ECB will be monitoring inflation “very closely,” the ECB’s desire to maintain an accommodative stance suggests we a medium-term rate hike pause after its two recent interest rate increases.
As you can see, central bankers from all around the world are being extra careful these days. And rightfully so, if you ask me! The threat of a global double-dip recession is looming just around the corner, and now more than ever, central banks need to do all they can to avoid another economic crisis. With so much uncertainty surrounding the global economy, there’s only one thing I’m certain of – I wouldn’t want to be in their shoes!