Monday, October 13, 2003
The monetary policy committees of the Reserve Bank of Australia, Bank of England and Bank of Japan met last week. While the RBA and the BoE preserved the status quo, the BoJ surprised. In its effort to provide greater liquidity to the economy, the Bank of Japan's policy board voted to raise the upper limit of reserves it makes available to lenders to ¥32 trillion ($293 billion) from ¥30 trillion. The bank left its monthly bond purchases from banks unchanged at ¥1.2 trillion. It also reaffirmed its 2½ year old policy of zero interest rates. In line with all recent monetary policy decisions, the BoJ said that it would provide liquidity above and beyond the current account target if financial markets looked unstable.
The increase in liquidity surprised the markets. Instead, investors were looking for signs that the Bank might tighten policy because of better-than-expected economic growth. The Bank's policy board vote was six to three in favor of raising the upper limit of reserves it makes available. The decision was probably made to tone down market speculation that the Bank was prepared to tighten monetary policy. But the move failed to reverse rising stock prices and the value of the yen. The central bank has said that it won't raise rates until prices (as measured by the core consumer price index for all of Japan) start to rise and the bank can be sure the price increases are there to stay - but they can't foresee the end of deflation at the moment. The yen's strength at current levels is not expected to dent improving profits of manufacturers. The real problem is that the stronger yen boosts imports of cheaper goods into Japan and exacerbates deflation.
The Reserve Bank of Australia left its benchmark interest rate unchanged at 4.75 percent for a 16th month as it seeks more evidence that the economy is recovering from its slowest growth in 2½ years. The central bank doesn't release a statement when it keeps rates unchanged. Signs of a pickup in global economic growth and an unabated borrowing binge to buy houses in Australia have prompted many analysts to look for an interest rate increase in the not-too-distant future. But the central bank may need more signs the world economy is recovering before it increases borrowing costs. As recently as July, most economists were forecasting the central bank would cut rates this year as the worst drought in a century slashed exports and the SARS outbreak reduced tourism. Now, faster global growth may force the central bank to raise rates by early next year because exports account for about 20 percent of the country's economy. There are signs Australian exports may be recovering from the drought and global economic slump. Exports rose 5 percent in August from a three-year low, which narrowed the trade deficit to its smallest in five months. A pickup in exports will increase consumer spending and home building and help spur the economy, which grew just 0.1 percent in the second quarter from a year earlier.
Like the RBA, analysts think that the next move for the Bank of England will be upward. The Bank of England's Monetary Policy Committee (MPC) left its key interest rate at 3.5 percent. The rate was last changed in June, when it was cut by 25 basis points. A surprisingly weak industrial production report in the week probably offset recently announced upward revisions in GDP. Industrial production sank 0.9 percent while second quarter GDP was revised up to 0.6 percent on the quarter from an originally reported 0.3 percent rise. The GDP data were extensively revised with the introduction of chain weighting to the national accounts. In the minutes of their September meeting, MPC members voiced concerns about the longer-term sustainability of current consumption growth and household debt accumulation. But offsetting strong domestic demand were doubts among members over the sustainability of the U.S. economic recovery and continuing EMU weakness. As usual, the Bank gave no explanation for its latest decision. Rather, Bank of England watchers will have to wait two weeks until the minutes of the meeting are released on October 22nd.
All 13 indexes followed here were up for a second week as signs of worldwide economic growth continue to emerge with greater frequency. But investors continue to focus on the U.S. economy's pulse rate by peeling through layers of economic data and earnings reports, looking for any sign that might give them a leg up.
RBA, BoE do the expected, BoJ doesn't
