Monday, September 8, 2003
Four central banks met but only one - the Bank of Canada - changed its interest rate policy. The first to announce its decision was the Reserve Bank of Australia, which as expected, left its key interest rate at 4.75 percent. The Bank doesn't release a statement when it holds rates steady. However, in August, it said the case for a rate cut had weakened since June because of the improving global economy and surging home lending. Despite GDP growth of just 0.1 percent in the second quarter, the Bank was not swayed to lower rates. The Bank remains concerned about rising home lending and property prices. Analysts say that the GDP number masked a domestic economy that was still buoyant. Much of the slowdown was due to a severe drought and weaker export volumes. Domestic demand, on the other hand, remained strong, rising 4.7 percent.
The Bank of Canada cut interest rates by 25 basis points to 2.75 percent. In its statement, the Bank said that inflationary pressures have eased and core inflation has dropped below the 2 percent inflation target sooner than anticipated. The economy has been battered by the SARS epidemic, forest fires and last month's power blackout in northeast United States and parts of Canada. The Bank last cut rates in July after a year of interest rate increases. Recent weak economic data include a 0.3 percent annualized rate of decline in second quarter GDP. The blows to Canada's economy began in April with the SARS epidemic, which badly dented the tourism industry. Then one case of BSE, or mad cow disease, was discovered in an Alberta cattle herd and in effect halted Canadian beef exports. Forest fires, which have raged throughout the summer in western Canada, are still not fully under control. The surge in the Canadian dollar against its U.S. counterpart in the first half of this year, which was fuelled by the wide interest rate differential between the two countries, has compounded exporters' problems. Canada's woes continued into the current quarter with the August 14th power blackout, which brought businesses to a standstill in the industrial powerhouse of southern Ontario.
As expected, the Bank of England Monetary Policy Committee left its key interest rate at 3.5 percent as fresh evidence emerged that the long-suffering manufacturing sector may be stabilizing at last. The manufacturing sector has been the Achilles' heel of the economy in the past five years. While unemployment has been falling since 1998, about 750,000 jobs have been lost in the manufacturing sector. Since the Bank last cut rates in July there has been consistent evidence that consumers remain in an upbeat mood. In July the committee said the cooling of the housing market meant that a rate cut was less likely to encourage consumers to accumulate more debt. The strength of borrowing will reduce the willingness of the MPC to ease monetary policy further. As usual, the Bank gave no explanation for its decision. Rather, Bank of England watchers will have to wait until the minutes of the meeting are released on September 17th.
The European Central Bank returned from their vacation and left their key interest rate at 2 percent despite continuing evidence that the eurozone is not growing. The Bank had lowered its policymaking interest rate by 50 basis points to 2.0 percent at its June 5th meeting - the lowest rate of any of the 12 nations sharing the euro since at least 1948, when Europe first received money from the Marshall Plan. The ECB's inflation target is 2 percent. Growth in the eurozone has been miserable, with Germany, Italy, France and the Netherlands all recording a negative GDP reading for the second quarter and all but France currently in a recession. The appreciation of the euro against the dollar and pound hurt exporters in the second quarter as their products became less competitive and profits shrank.
With August behind them, investors returned from the end of the summer holiday season and directed their attention, and buying, to equities. But unlike the last several years, analysts are increasingly bullish about prospects after a month of low volume and uninspired trading. The first week in September saw many indexes jump to multi-month highs, and trading volumes pick up to their best levels in months. All 13 indexes followed here were up on the week, although stocks in the U.S. and Europe wavered on Friday after a very disappointing employment situation report. Asian markets were already closed for the week.
A flurry of central bank decisions
