Central Bank Watch: BOE & ECB Interest Rate Expectations Update The last few years, the Central Bank of the United States (BCUS) has tried everything it can think of to keep inflation from going through the roof and has done so successfully. However, recent statements by two leading officials have raised a storm in many European countries, especially France, where the central bank is seen as overly aggressive. In fact, they have been widely criticized for their rate cuts which have caused consumers to pay more for basic products. The latest cuts in interest rates are not expected to have much effect on economic growth. This is a warning sign for other European countries where the Central Bank is seen to be too powerful.
Inflation Expectations: BoE Has Cut Rates The indications coming from the US central bank is that it does not see the high inflation rates that it had during the past to be a sustainable trend. Consequently, it has cut its official interest rate which sent shock waves throughout the financial markets across the globe. In addition, it has cut its deposit rate which indicated the rate at which commercial banks can loan money to businesses has been reduced. The negative impact of these rate cuts will only be felt in the short term as higher interest rates will need to be compensated in order to curb inflation.
Consumer Debt Consolidation: Central Bank Watch If consumer debt consolidation is what has driven inflation over the past few years, then the current measures being put in place by the Fed may be contributing to this phenomenon. In an era of credit binge, more households have been able to increase their borrowing to unsustainable levels. This has in turn resulted in a situation where credit is too easy to obtain and too hard to repay. When the central bank steps in with monetary stimulus, it attempts to eliminate this excess debt which is hampering economic growth.
Balance sheet reforms: BoE Has Restricted Its Balance Sheet Reforms The last few years have seen the BoE cutting most of its overnight interest rate cuts when inflation remained low and growth was slow. However, at the recent meeting, it raised rates again, albeit in a very mild manner. Its base rate may be raised as low as it is, however the goal is to get it to hit zero percent. By doing this, it aims to lower the systemic risk that it incurs through its policy measures.
Transactions Taxes: Central Bank Watch On the one hand, the BoE has stated that it will not cut the base rate. On the other hand, the European Central Bank, the EU, cut its deposit rate by 25 basis points to bring it closer to zero percent. On balance, this action by the European Central Bank has significantly reduced the transactions costs for both the EU and the BoE.
Market Interest Rate Rises: Central Bank Watch On the one hand, the BoE has stated that it will not cut the base rate. On the other hand, the European Central Bank, the EU, cut its deposit rate by 25 basis points to bring it close to zero percent. On balance, this action by the European Central Bank has reduced the transactions costs for both the EU and the BoE. However, it has increased market volatility, with the Euro falling against the Dollar. The result of this action by the European Central Bank has significantly reduced inflationary pressures in Europe.
Purchasing Managers’ Index (PMI): On the one hand, the BoE has stated that it will not cut its base rate. On the other hand, the European Central Bank, the EU, cut its benchmark interest rate by 25 basis points to bring it close to zero percent. On balance, this action by the European Central Bank has reduced market volatility, with the Euro falling against the Dollar. However, it has increased market risks, with the Euro becoming a safe haven for purchases by European Central Bank policy makers. It also led to higher spreads between yields on Greek and Eurozone securities, with the former providing less volatility and the latter more.
Changes in the Consumer Price Index (CPI): Following the announcement by the BoE, the EU and the Bank of Japan, the CPPI index, a measure of inflationary pressure in the economy, increased unexpectedly, driven primarily by higher oil and fuel prices. In line with this, the BoE indicated that it may move to raise the base rate of its official base rate to 4.5 percent from current levels. This would mark a significant change, with negative implications for the Japanese and EU economies. On the other hand, the Bank of America and the U.S. Federal Reserve have indicated that they will keep rates on hold, despite pressure from the BoE. Uncertainty over the direction of the bank’s policies added further volatility to markets.