The Fed left monetary conditions unchanged this week with the FOMC continuing to signal no change in monetary condition until late 2014. They continue to leave the door open to further monetary easing. However, the economic forecasts accompanying the statement showed the FOMC has a somewhat more upbeat view with a downward revision to their unemployment forecasts and an upward revision to both GDP growth and inflation. While this is not yet sufficient for the Fed to start withdrawing stimulus, it does help confirm the odds of QE3 are lower than they were. Whether the Fed goes down the path of QE3 remains highly dependent on how the data plays out over the period ahead, with most attention focusing on the labour market. The labour market provides the FOMC with reasons both for (elevated unemployment, slow jobs recovery) and against (zero productivity, rising unit labour costs) further monetary accommodation.
Banco Central do Brasil
As was suggested in the minutes of the previous Copom meeting when the committee cut the Selic rate 75bps to 9.75%, interest rates were cut again this week. The Selic rate was slashed another 75bps to 9.0%. That’s nearly down to the historic low of 8.75% reached during the Global Financial Crisis. Those minutes also suggested 9.0% would be the likely low, but the minutes from this meeting suggest further interest rate reductions are on the cards. If the primary aim is to reduce the exchange rate, the Bank is having some success. The Real is down just under 20% from its peak in July last year. We continue to worry, however, that the Bank may be creating a bigger headache for itself further down the track. While growth has been slowing, we expect that to be picking up in the second half of the year on the back of both stimulatory monetary and fiscal settings. Capacity constraints are already tight (unemployment at 25-year lows), leading us to expect that inflation will be heading higher in 2013.
Reserve Bank of India
India made its first cut in interest rates this cycle this week, cutting its key policy discount rate 50bps to 8.0%. This move followed two cuts this year to the cash reserve ratio in response to tightening credit conditions. We agree with the RBI’s assessment that scope for lower interest rates remains limited. As we have mentioned before, India is the emerging economy where recent high commodity prices have had greatest spill-over into more generalised inflation. Furthermore, the RBI recognises that part of the recent slowdown in GDP growth is a move to a lower post-GFC trend growth rate, indicating there is limited spare capacity.
Reserve Bank of Australia
The RBA meets next week, but the preconditions for an easing would appear to have been met. At its last meeting the RBA signalled a rate cut was on the cards so long as March quarter inflation data behaved. That data was released this week and it came in well below expectations: the CPI rose +0.1% in the quarter versus a market expectation of +0.6%, thanks largely to a 60% fall in banana prices. More importantly, core inflation also came in below expectations. The AMP Capital team in Sydney tells us the RBA should cut rates by 50bp next week.
Reserve Bank of New Zealand
The RBNZ had a scheduled OCR review this week rather than a full Monetary Policy Statement. As was universally expected they left rates unchanged, but they took the opportunity to try and talk the NZD down again. As we mentioned in the post below, the recent strength of the New Zealand dollar has had a significant disinflationary impact. The challenge for the Bank is that domestic inflationary pressures are by no means dead and buried. Indeed there was sufficient evidence in the CPI result to support the view of a tightening from later this year. The Bank is clearly frustrated by the continued strength in the currency and appears ready to change its indicated monetary policy course (a bias to tighten) should that be warranted. We too believe the NZD should be lower, especially on the back of recent falls in commodity prices and the fact that the current account deficit is on a deteriorating trend back towards 6% of GDP. At the moment we are happy with our view of a December OCR tightening with the OCR moving up to 4.5% over 2013.
Stop Press: Bank of Japan
The BoJ has just announced a ¥10 trillion extension to its asset purchase program. Such a move had been widely anticipated by markets following signs the Japanese economy was slowing again after an initial burst of earthquake reconstruction activity. Industrial production rose 1% in March, below average expectations of 2.3%.