Comparison of Central Banks Bold Actions to Interest Rate and Inflation End of Q2

Posted by Lulama Msungwa -
Scope Markets

Table of Content

Reserve Bank of New Zealand

Central banks of the world have had a heavy couple of weeks. The Reserve Bank of New Zealand has again left the interest rate unchanged, the funding for the lending program unchanged, and the large-scale asset purchase program unchanged as part of the bank’s plan to help businesses affected by the pandemic and support the economy amid rising inflation. However, the bank stated in its statement for the previous meeting that it will maintain monetary settings until it is confident that inflation and employment targets for the bank have been achieved.

The CB has stated in their statement that aggregate level of employment. At the same time, fiscal spending will continue to be the focus for the bank to support economic activity. Central banks like RBNZ are still facing Covid-19 restriction backlash to some extent.

The Reserve Bank made a positive remark during their meeting that they remain cautious. However, the ongoing virus-related restrictions and price pressure on businesses are likely to be temporary and expected to abate over the year. The interest is now on the July meeting and could be very key for the investors.

Reserve Bank of Australia

Minutes from the June RBA meeting showed the member becoming more optimistic about the economic recovery. However, they remain concerned about weak inflation and wage growth. Therefore, the loose monetary policy will remain unchanged in the coming years. We may hear more details about the quantitative easing plan at the next meeting after it expires in September.

The Reserve Bank of Australia acknowledged that “the unemployment rate is falling faster than expected, and there are reports of labor shortages in certain parts of the economy. However, the main indicators of employment growth, including job vacancies, indicate that employment growth continues to be strong, and the unemployment rate is expected to drop to around 5% by the end of 2021. Central banks worldwide, including the RBA, are actively working on key factors to reduce unemployment rates as much as possible and get the economy up and running quicker.

Regarding the outlook for employment monetary policy, the Bank of Australia stated that it will not raise interest rates until 2024 at the earliest. Regarding quantitative easing purchases, policymakers believe it will be “premature” to suspend the plan after September. The three feasible options proposed at the meeting include:

1) Repeat the purchase of 100B Australian dollars for another 6 months;

2) Reduce the number of purchases or extend the purchase time;

3) Switch to a method of reviewing the pace of bond purchases more frequently based on data flows and economic prospects. Regarding the control of the yield curve, the committee members reiterated that they would decide whether to target the April 2024 bond or extend it to the November 2024 bond. As suggested in the minutes of the meeting, “A key consideration in performance goal decisions is to assess the likelihood of meeting this condition sometime in 2024.”

Federal Reserve Bank

We have evoked your perspectives for a revised inflation growth and forecast. Despite a better growth perspective, and despite the temporary nature of the increscent pike, we also predict its prediction for most of the payer in 2023 (2024 in March)

Powell could float the idea of tapering bond purchases in the September conference. Our base case remains the layer at the December meeting, but if inflation is more permanent than expected, it is believed that the taper has remained in September.

On Wednesday Fed will Liberate new statements, parcels of points, and economic forecasts. Currently, vaccination is in progress, and the Fed is expected to provide the first latest information on monetary policy since the FOMC meeting in December.

We hope the growth and improvement of the unemployment forecast to pull the median of the central value of the leading forward excursion up to 2023. At the same time, we have a long way to recover economic recovery, but it is still chaired, but it is likely to begin until the second half of this year.(Despite this, the results for the banking sector for 2Q is very optimistic).

We do not expect the latest inflation report to change the Fed’s view that this will eventually prove to be temporary. However, President Powell may continue to emphasize that the Fed has the tools to deal with higher inflation if necessary. Given that inflation is still expected to be temporary, we believe that growth rate and unemployment rate forecasts will be used to justify a more aggressive dot plot. Among the central banks, the Fed is the one still cautiously moving forward.

European Central Bank

One of the central banks seen as struggling is the ECB. In the latest ECB statement, the president stated that as the pandemic situation improves and vaccination campaigns progress significantly, the eurozone economy is gradually reopening. The latest data indicate a rebound in service activities and continued vitality in manufacturing production. With the lifting of new containment measures, we expect economic activity to accelerate in the second half of this year. The rebound in consumer spending, strong global demand, and lax fiscal and monetary policies will support recovery.

European Central Bank Scope Markets

The European Central Bank pointed out that because the short-term economic outlook still depends on the course of the pandemic and the economic response after the reopening, uncertainty still exists. Nevertheless, inflation has increased in recent months due to the base effect, transitional factors, and rising energy prices. O

Furthermore, it is expected to rise further in the second half of the year, and then decline as temporary factors recede. Therefore, our research team’s new forecasts indicate that potential inflationary pressures will gradually increase throughout the forecast period. However, the pressure remains moderate while the economy is still significantly weaker and will only be gradually absorbed during the forecast period. Therefore, during the forecast period, headline inflation is expected to remain below our target.

The European Central Bank stated that they will keep interest rates unchanged and expect interest rates to remain at current or lower levels until they see the inflation outlook converge steadily to levels close enough but below 2% within our forecast range, and This convergence is constantly reflected in the dynamics of core inflation.

Bank of England

One of the central banks already seeing some positive results is the BoE. The British economy may need less monetary support because it is becoming a gang hunter, and inflationary pressures are rising. Wages in the UK have already started to rise, but they need to go up further.

It is also necessary to create enough high-paying jobs to allow the economy to run so that people on vacation can support each other and return to the work world. The current strong economic rebound means that inflation may soar, and the Bank of England should start to withdraw its currency support at some point to prevent it from doing so.

However, the British economy is bullish, and after people flock to bars, shops, hair salons, and gyms, it may rebound like a “coiled spring”. A series of economic data seems to point in this direction. For example, according to the latest industry purchasing managers’ index survey, the service industry showed the fastest growth rate in 24 months (about 2 years) in May.

 But it also shows that inflation is increasing. Due to rising personnel costs, transportation costs, and raw material prices, the prices charged by businesses such as bars and restaurants have risen the most since the survey began in 1996.

Driven by unprecedented stimulus measures from the government and central bank, the current concern is that an increase in demand after the lockdown will trigger a destructive rise in inflation.

Although moderate inflation is considered healthy for the modern economy, higher inflation is not. As a result, concern about inflation has caused global stock markets to fall, as traders worry that price increases will induce central banks to raise interest rates or begin to control monetary stimulus measures, which have contributed to strong stock market gains in recent years.

Bank of Canada

Among the central banks keeping it steady is the BoC. The Bank of Canada maintained its main interest rate target at 0.25%. However, since the beginning of the pandemic last year, the interest rate has been at its lowest level. The central bank has stated that it will not raise interest rates until the economy recovers.

The bank stated that household spending in the first three months of this year was stronger than expected, and imports increased, indicating increased consumer confidence and demand elasticity. However, the statement added that it was closed again during the third wave of pandemics.

As expected, economic activity slowed down in the second quarter, affecting workers in high-touch industries such as restaurants. However, the bank said that it expects a strong recovery in the Canadian economy from this summer. This is due to consumer spending, as the development of vaccines has accelerated, and the provincial government has eased economic restrictions.

The bank also stated that due to the increase in gasoline prices and comparing current prices with low prices last year due to the pandemic, the annual inflation rate in the summer is expected to be around 3%. The bank also stated that it will continue to buy federal bonds after reducing its purchases due to improving economic conditions a few weeks ago.

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