Monetary Policy Analysis – The World of Central Banks

January 27, 2015

The extremely loose monetary policy gains ground again. A simple monetary policy analysis of any central bank tells us so.

Central banks lower their non-existent interest rates, launch QE’s and cut inflation forecasts. The fact that Bank of Canada (BOC) cut rates was perhaps the biggest surprise of them all. Their neighbor, the United States, is doing rather well.

But the BOC might not be the last central bank to cut rates. Rumors say that the next in line is the Reserve Bank of Australia.

World's Monetary Policy Analysis

The Quantitative Easing (QE) program in Eurozone, announced by the ECB last week, is another „wonderful“ financial experiment. It is no secret that the key to solving the Euro area problems lies in the structural reforms.

However, if those reforms remain 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 reacted normally. A simple monetary policy analysis tells anyone easing is necessary.

Central bankers' job is to make sure that the Eurozone inflation stays below but close to 2%. Currently, we are miles away from that target.

And, with that, the ECB found itself in a position where it had to make a move.

As Bank of England (BOE) turned dovish last week, all hopes to see a rate hike from there are most likely gone and gone for good. The idea of a rate hike in the 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 any kind of monetary policy tightening is in the hands of the largest central bank in the world – the Federal Reserve of the United States (FED).

Monetary Policy Analysis

Conclusion

However, we might have a problem there too. Lately, the data from the US disappointed.

And, some of the figures were simply terrible. For example, the recent Durable Goods Orders m/m which fell a whopping 3,4% and Core Retail Sales which came in 1% lower than expected.

Now, take that data and add a lower inflation. You may reach a conclusion that any rate hike from the U.S. is pretty much out of the question right now.

Fortunately, we don’t have to wait very long to get more clues. The first Federal Open Market Committee (FOMC) Statement in 2015 will come out tomorrow.

 

Capital Properties FX
January 27, 2015

Capital Properties FX