Central Bank Interest Rate Outlook
Written by Sonu Sadarangani, DailyFX Research
Highlights of Latest Policy Meetings:
Federal Reserve
In a statement released on
June 22, 2011, the Federal Open Market Committee announced its decision
to maintain its target interest rate between 0.00 and 0.25%, a level
held unchanged since December 2008. The discount rate, at 0.75%, remains
at a level below the 1% historical spread from the fed funds rate.
According to information
received from the Committee's most recent meeting, "economic recovery is
continuing at a moderate pace, though somewhat more slowly than the
Committee had expected." Two significant factors contributing to the
slow recovery include high food and energy prices and supply chain
disruptions following the Japan earthquake. The housing market continues
to remain weak as well. However, there are bright spots signaling
economic recovery. Household spending and business investment in
equipment and software showed strong gains. Additionally, the Fed has
been able to achieve its target inflation rate of 2%, primarily due to
higher prices of commodities and imported goods.
Looking ahead, the FOMC
"seeks to foster maximum employment and price stability consistent with
its statutory mandate." Unemployment currently remains at elevated
levels and inflation needs to be stabilized as it climbs beyond the
target level. The unemployment rate rose unexpectedly in June to 9.2% from 9.1% in May. The Committee expects a gradual decline in unemployment as the pace of economic recovery picks up in the second half of 2011 and
inflation to ease once food and energy prices subside. The Committee
revised GDP and unemployment forecasts downwards from April projections.
The change in GDP forecasts for 2011 and 2012 have been revised from
3.3% to 2.9% and from 4.2% to 3.7%, respectively. The unemployment rate,
previously forecasted to drop to 7.9% by 2012, is expected to remain
above 8% for the period.
Slower than expected
recovery and "a subdued outlook for inflation are likely to warrant
exceptionally low levels for the federal funds rate for an extended
period." Although QE2 ended on June 30, 2011, the Fed will continue to
buy treasuries under its asset purchase program. The next rate decision
meeting will be held on August 9, 2011 and "the Committee will continue
to monitor the economic outlook and financial developments and will act
as needed to best foster maximum employment and price stability."
FOMC Statements and Calendar at: http://www.federalreserve.gov/FOMC/default.htm#calendars
European Central Bank
At its meeting on July 7, 2011, the Governing Council of the European Central Bank (ECB) decided to increase the key ECB interest rates by 25 basis points to 1.50%.
In his introductory statement following the meeting, ECB President
Trichet elaborated on the bank's action to increase the key rate level
stating "the underlying pace of monetary policy expansion is gradually
recovering. Monetary liquidity remains ample, with the potential to
accommodate price pressures in the euro area. All in all, it is
essential that the recent price developments do not give rise to
broad-based inflationary pressures over the medium term." The recent
rise in energy and commodity prices have contributed to rising prices in
the euro area reflected in the 2.7% June HICP inflation figure. With
the ECB's objective of keeping inflation below, but close to 2% in the
medium term, Trichet addressed these inflationary concerns stating "our
decision will contribute to keeping inflation expectations in the euro
area firmly anchored in line with our aim of maintaining inflation rate
targets." Trichet continued further on the ECB's objective saying that
"this [objective] is a prerequisite for monetary policy to make an
ongoing contribution towards supporting growth and job creation in the
euro area."
Data revealed real GDP
growth of 0.8% in the first quarter of 2011, quarter over quarter, a
marked increase over the 0.3% growth in the final quarter of 2010.
"Recent statistical releases and survey-based indicators point towards a
continued expansion of economic activity in the euro area in the second
quarter of this year, albeit at a slower pace." This is indicative of
the interest rate remaining at 1.50% over
the medium term. Although expansion of the global economy should help
the euro area, the Governing Council's assessment states that risks to
the economic outlook "remain broadly balanced in an environment of
elevated uncertainty." The June 2011 Eurosystem staff predicts an annual
real GDP range of 1.5% to 2.3% for 2011 and a range of 0.6% to 2.8% for
2012.
Aside from the monetary
policy changes, Trichet emphasized the need for effective fiscal
policies and structural reforms in the different euro zone economies.
"The implementation of ambitious and far-reaching structural reforms
is urgently required in the euro area to strengthen substantially its
competitiveness, flexibility and longer-term growth potential. This is
particularly relevant for countries with high fiscal and external
deficits or with past losses in competitiveness," Trichet concluded.
ECB Statements can be found at: http://www.ecb.int
Bank of England
On July 7, 2011, the Bank of
England's Monetary Policy Committee voted to maintain the official Bank
Rate paid on commercial bank reserves at 0.5%, leaving it unchanged for
the 28th
straight month.