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The World of Central Banks

January 27, 2015

It seems that extremely loose monetary policy is starting to gain ground again as central banks are lowering their non-existent interest rates, launching QE’s and cutting inflation forecasts. The fact that Bank of Canada was forced to cut rates was perhaps the biggest suprise of them all as their neighbour, United States, is doing rather well. But the BOC might not be the last central bank to cut rates as there are already rumours circling around the web that the next in line is the Reserve Bank of Australia.

The QE program in Eurozone, that was announced by the ECB last week, is another „wonderful“ financial experiment. It is no secret that the key in solving the Euro area problems lies in the structural reforms but if those reforms are put on hold or are not completed at all, then it does not really matter how much money ECB pumps into the broken system.

On the other hand, ECB’s decision was prefectly reasonable as their job is to make sure that the EZ inflation stays below but close to 2%. Currently we are miles away from that target and with that, ECB was put into a position where they had to make a move.

As BOE (Bank of England) turned dovish last week, all hopes to see a rate hike from there are most likely gone and gone for good. To be honest, the idea of a rate hike in UK, while Euro area is preparing for a massive QE, sounded quite insane in the first place. This means that the only hope to see anykind of monetary policy tightening is in the hands of the largest central bank in the world – the FED.

However, we might have a problem there too. Lately, the data from the US has been weaker than expected and some of the figures have been simply terrible. Like the recent Durable Goods Orders m/m which fell a whopping 3,4% and Core Retail Sales which came in 1% lower than expected.

If you take all that data and add a lower inflation & a strong USD into that equation, you may reach a conclusion that any rate hike from the US is pretty much out of the question right now. Fortunately, we don’t have to wait very long to get more clues as the first FOMC Statement in 2015 will be released tomorrow.

Capital Properties FX
27.01.2015
Kaarel