Central Banks Still Cutting Rates

Monetary Policy Week in Review – Jul 1-5, 2013: ECB, BOE launch forward guidance, Poland, Romania cut rates

by Peter Nielsen, Central Bank News

This week the European Central Bank (ECB) and the Bank of England (BOE) expanded their arsenal of monetary policy tools to counter the spillover from the Federal Reserve’s decision to wind down quantitative easing and prevent the subsequent rise in interest rates from snuffing out Europe’ economic recovery.

The ECB and BOE wanted to convey a similar message to financial markets: We are a long way away from tightening our policy and the rise in global bond yields will have a negative impact on our economies.

The move by the ECB and BOE follows recent attempts by central banks in emerging markets to tackle the spillover from the change in U.S. monetary policy, illustrating the power of globalized financial markets to challenge central banks that base their policies on domestic economic conditions.

While markets and analysts were focused on the launch of forward guidance and a continuation of easy policy by the BOE, along with a possible rate cut by the ECB, the central banks of Sweden and Poland took the opposite tack, signaling that their policy won’t be eased any further.

Even the Reserve Bank of Australia (RBA), which expects to see the benefits of a 10 percent fall in its dollar, appeared to pull back on its readiness to cut rates. In this week’s statement, the RBA said it saw “some scope for further easing,” compared with June’s statement of “scope for further easing,” signaling that the room to cut rates had narrowed ever so slightly.

This week featured seven central bank policy decisions, with two cutting rates: The National Bank of Poland’s (NBP) third rate cut in a row along with the National Bank of Romania’s (NBR) first rate cut this year.

The other five central banks that took policy decisions this week maintained their policy rates: the RBA, the BOE, the ECB, Sweden’s Riksbank and the Bank of Uganda (BOU).

Through the first 27 weeks of this year, central bank policy rates have been cut 66 times, or 25.4 percent of the 260 policy decisions taken by the 90 central banks followed by Central Bank News, slightly up from 24.9 percent last week, indicating that the global trend toward lower policy rates remains firmly in place.

LAST WEEK’S (WEEK 27) MONETARY POLICY DECISIONS:

NEXT WEEK (week 28) features 11 scheduled central bank policy meetings, including Malawi, Thailand, Croatia, Brazil, Japan, South Korea, Serbia, Indonesia, Malaysia, Peru and Mexico.