Monday, June 2, 2003
Will they or won't they?
That is the question - especially when it concerns European Central Bank monetary policy. This is a big week for central banks with those of Canada, Australia, and England along with the ECB holding monetary policy meetings. Expectations are mixed as to whether interest rates will be changed.
European Central Bank
Analysts have been saying since the last ECB Governing Council monetary policy meeting on May 8th that the ECB would finally cut rates in June. Well it's June. But the pre-meeting rhetoric hasn't exactly offered a cast iron clue. Generally when a currency rises, it is considered a de facto interest rate increase. But monetary policymakers seem to be condoning the sharp increase in the value of the euro as it finally vaulted - albeit briefly - over its 1999 introductory level. The prior embarrassment caused by the euro's long drop has now been replaced by satisfaction that the currency has been redeemed, despite the growing discomfort of exporters who have seen their prices rise and profits fall. The higher euro gives the European Central Bank more latitude to cut interest rates, something that European businesses, especially those in Germany, want it to do anyway. Oil, which is priced in dollars, is falling in euro terms, easing inflationary pressures. The ECB key interest rate is 2.5 percent - double that of the Federal Reserve.
Bank of Canada
Since its last meeting, Canada has been beset by a SARS problem in Toronto, which has devastated that city's tourism economy, and a case of mad cow disease in Alberta, which has wiped out beef exports. Inflation remains irksome. Analysts expect the Bank to leave rates unchanged at 3.25 percent because of worries over the timing of a U.S. recovery, the rapid tightening in policy implied by Canadian dollar appreciation, and the potential impact of the SARS and mad-cow outbreaks. The latter is too recent an event to assess but may prove to be negligible.
Bank of England
Most analysts expect that the Bank of England's Monetary Policy Committee will leave interest rates unchanged at 3.75 percent. This is despite the fact that the MPC was split down the middle in its last meeting, with five members voting for unchanged rates and four for a cut. Inflation as measured by the retail price index excluding mortgage payments has been above the Bank's inflation target for six months. Manufacturing has been in recession for over a year while the service economy, brisk consumer spending, and the housing sector carried the economy.
Reserve Bank of Australia
The Reserve Bank of Australia is expected to keep monetary policy on hold at 4.75 percent. The merchandise trade deficit ballooned while strong retail sales data stunned the market. Both are symptomatic of a strong economy. The RBA and the Bank of Canada have been the only two central banks to raise interest rates in the past year, in contrast to the ECB, Bank of England and the Federal Reserve.
A happy ending to the merry month of May
Equities boasted a positive week overall. With the first-quarter earnings season over and economic news still mixed, some say there is little to drive further buying except expectations that things will improve during the second half. But hopes for a second-half rebound - which have been thwarted the past two years - do seem to be gaining traction as many U.S. indicators surprised on the plus side last week. For the first week since mid-March, all 13 indexes followed here were up on the week. And as May ends, 10 of the 13 indexes are above year-end 2002 levels. Only the Paris CAC and the two Japanese indexes - Nikkei and Topix - are below.
Calm before central-bank deluge
