Monday, March 10, 2003
Equity markets were pressured downward once again as investors took cover in safe havens. All indexes tracked here sank on the week. The litany of reasons contains the now usual suspects - terrorism fears, pending war with Iraq and North Korean arrogance. And don't forget souring economic growth everywhere, thanks to all of the above. Companies are awaiting resolution to proceed with business, and consumers are holding back purchases. Just about everyone is depressed as this very long, cold winter continues on its never-ending way. On the week, losses ranged from 0.3 percent (Mexican Bolsa) to 6.5 percent (Paris CAC). Weekly North American losses generally were less than those in either Europe or Asia.
Central bank scorecard - one up, one down, three no change
In the seemingly unending list of bad news, only the Bank of Canada cited enough growth to justify an increase in interest rates. The Bank surprised analysts and raised their key interest rate for the fourth time by 25 basis points to 3 percent. The Bank was forced to raise rates to combat a surge in inflation - prices are jumping at their fastest pace in more than a decade. The Bank of Canada uses an inflation target range from 1 to 3 percent but aims at the midpoint of 2 percent. The rate increase brings the gap between the Bank of Canada and the Federal Reserve to 1.75 percentage points, the widest since May 1995 when the Bank of Canada ended a series of rate increases also to keep inflation in check.
Last year's record job creation and purchases of cars and homes helped the Canadian economy expand 3.4 percent. Canada's economy, the smallest in the Group of Seven major industrialized nations, is expected once again to outpace its peers with 3 percent growth this year, according to the International Monetary Fund. The Bank said it might need to raise rates further to slow price increases. The Bank of Canada's preferred inflation measure, which excludes eight volatile components such as oil, has exceeded its 2 percent target since February 2002. It has been above 3 percent for two of the past three months, the first time that has happened since the Bank of Canada adopted inflation targets in 1991.
The European Central Bank cut its key interest rate by 25 basis points to 2.5 percent, its second rate cut in four months. The new level matched the bank's previous low of 2.5 percent in April 1999. Many ECB watchers were disappointed - they had been hoping for a 50 basis point cut given the weakness of the EMU economy. Consumer inflation, the most closely watched measure, has been above the Bank's 2-percent target ceiling for five months and initial estimates indicate that the trend continued into February.
The Bank of England left its interest rate unchanged at 3.75 percent - a 48 year low - as growth slowed and inflation soared above its inflation target of 2.5 percent for the third month. The Bank had lowered interest rates by 25 basis points in February to 3.75 percent. As usual, the Bank did not offer an explanation of the move. Bank watchers will have to wait for two weeks for the minutes of this meeting to be released. After managing to avoid recession, the British economy has weakened. As in the United States, manufacturing continues to shrink while growth in the service sector slows. Consumer confidence and the stock market have fallen because of concerns that a war in Iraq may interrupt oil supplies and curb business investment.
The Reserve Bank of Australia kept its benchmark interest rate unchanged at 4.75 percent for a ninth month as the worst drought in a century and a rising currency slow economic growth. The Bank has held borrowing costs at 50 basis points above a 30-year low to encourage consumers and businesses to spend. A drought has parched 70 percent of the nation and cut farm production to its lowest in 20 years. Reduced global demand has crimped exports, which make up one-fifth of the economy. The Bank indicated that the case for increasing rates had diminished because of the prolonged global economic slowdown. The economy has been expanding at an almost 4 percent annual pace, buoyed by a surge in home building and consumer spending.
As expected, the Bank of Japan's policy board unanimously left monetary policy unchanged following their two-day meeting. With their key policy interest rate at zero, the Bank has resorted to buying government bonds. The BoJ said it would continue to purchase ¥1,200 billion of government bonds each month, and repeated that it would provide more liquidity to stabilize the market if necessary before the end of the financial year on March 31st. This meeting was the last under Governor Masaru Hayami before he retires on March 19th to conclude his five-year term. Toshihiko Fukui, who is considered a conservative central banker in the same mold as Mr Hayami, will replace him on March 20.
The move by the ECB precipitated a surprise interest rate cut in Switzerland. The Swiss franc has risen in value, having become a preferred safe-haven currency in lieu of the U.S. dollar. The Swiss National Bank cut its official interest rate target band by 50 basis points citing its desire to avoid a tightening of monetary conditions due to an appreciation of the Swiss franc. The SNB cut the target range for the 3-month Libor interest rate to 0 percent to 0.75 percent from the previous 0.25 percent to 1.25 percent range. The bank said its intention for the time being was to keep the 3-month Libor rate at around 0.25 percent. The SNB said the continuation of global economic and political uncertainties was adversely affecting the business climate in Switzerland and could delay the economic upturn that was expected this year.
That sinking feeling
