By Anne D. Picker, International Economist,Econoday
Monday, January 29, 2001

Central bank watching all the vogue
Central bank meetings past and future are dominating investors' thinking. The Bank of Canada cut its key policy making interest rate Tuesday by 25 basis points to 5.75 percent. The Bank said the country's economic fundamentals are still sound but a slowdown south of the border has been more abrupt than expected. Markets had been expecting a move even though recent economic indicators had been strong as Canada continues to outpace the United States. The interest rate cut was the last under governor Gordon Thiessen, who is retiring this week. Deputy health minister David Dodge will replace him.

The Bank of England's Monetary Policy Committee voted to leave its policy making interest rate unchanged at 6.0 percent in January by a margin of five to four, according to minutes of the meeting. Four of the nine members voted for an immediate 25 basis point cut. However, those who voted to keep rates steady cited the combination of international and domestic outlooks. They argued that a prolonged U.S. slowdown was unlikely even though it does pose a downside risk, and said that the reasons behind the Fed rate cut had "no obvious counterparts in the UK." However, given the drop in gross domestic product in the fourth quarter, bets are that the Bank will cut interest rates as soon as their February 7 and 8 meeting.

The Bank of Japan is embroiled in an interest rate squabble yet again. The Bank and the Finance Ministry continue to argue about how best to revive the flagging Japanese economy. Although Japan's economy grows evermore weaker, Governor Masaru Hayami said the Bank has no intention of returning to ZIRP - zero interest rate policy - which had been in effect prior to August 2000 when interest rates were raised to 0.25 percent. Many in the government blame the Bank for many of the economy's troubles. The Bank's decision to lift rates in August was made in the face of strong opposition from the government, which routinely meddled in interest rate policy before a law was passed in 1998 giving the BOJ independence.

But in an unusual move after the meeting, Hayami acknowledged the growing concern over yen weakness and its detrimental impact on the stock market. Governor Hayami told reporters that "the yen is too weak", a view that contradicted the stance of the Finance Minister Kiichi Miyazawa who thinks that the yen is too strong.

In its January report, the Bank of Japan lowered its economic assessment for the second straight month, saying exports and industrial production are slowing as the drop in overseas demand takes its toll. It warned that exports and industrial output might slacken even more as economies in the United States and Asia slow.

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