Monday, June 9, 2003
Sorting out central bank decisions
The European Central Bank lowered, as expected, its key policymaking interest rates by 50 basis points to 2.0 percent. But the Reserve Bank of Australia and the Banks of Canada and England preferred to keep the status quo. The ECB action triggered 50 basis point cuts by the Bank of Denmark and the Swedish Riksbank. However, the Swiss National Bank did not act. The Bank of New Zealand cut rates for a second time in six weeks and said it may reduce borrowing costs again to bolster an economy that is expected to contract in the second quarter.
The ECB's new rate is the lowest among any of the 12 nations now sharing the euro since at least 1948, when Europe first received money from the Marshall Plan. Though inflation has been mostly above the ECB's 2 percent ceiling since early 2000, falling energy prices and the rising euro have helped ease the threat of late (the flash estimate for inflation was 1.9 percent in May). Growth in the eurozone has been miserable, with unemployment climbing in most member countries and especially in Germany. First quarter German GDP was unchanged while the country's unemployment rate is 10.7 percent. The appreciation of the euro against the dollar and pound is beginning to hurt exporters as their products become less competitive.
The Bank of Canada left its key interest rate at 3.25 percent. Inflation, a problem for a few months, has once again dropped within the Bank's target range of 1 to 3 percent. Canada continues to be the fastest growing country of the Group of Seven (Canada, Germany, France, Italy, Britain, Japan and United States). Although economic growth is easing, domestic demand has remained strong until now. Canadian interest rates, in order to attract investment, are typically above those in the United States. This spread is now 200 basis points. The Canadian dollar has been a beneficiary of the Bank's interest rate increases. However, the rising loonie is pinching manufacturers' competitiveness and SARS is biting into employment and domestic demand.
The Reserve Bank of Australia left its key rate unchanged at 4.75 percent. As is its usual practice when leaving monetary policy unchanged, the RBA issued no statement. The Australian dollar rose to its highest level in almost 3½ years, preserving the widest gap between U.S. and Australian rates in a decade.
As expected, the Bank of England monetary policy committee kept its key interest rate at a 48-year low of 3.75 percent. Inflation has been above the Bank's 2.5 percent target for the past six months, mostly because of energy costs. This was the last monetary policy meeting chaired by Sir Edward George, the outgoing governor. At their May meeting, the committee was split on whether to cut interest rates. The bank last cut rates in February. As usual, the Bank gave no explanation for its decision, although analysts pointed to the weak pound sterling, signs of a post-war bounce in equities and the continuing strength of the housing market and consumers as reasons why rates were unchanged. Bank of England watchers will have to wait two weeks until the minutes of the meeting are released for an explanation of the MPC's actions.
Equities had a good week overall. Investors appeared to give more weight to better-than-expected data than they did to weaker-than-expected data, at least in the United States. Overseas markets were bolstered by gains in U.S. stocks. For the second week, all indexes tracked here were up. Now all 13 indexes are above their year-end 2002 levels.
Central bank avalanche
