The Fed goes into black-out mode ahead of next week’s FOMC meeting which will be a key meeting in that it will share updates of quarterly staff projections and forecasts from FOMC officials. The Bank of Canada announced Tuesday that it will keep its benchmark interest rate unchanged at 1%. The overnight lending rate has been kept at this level since September 2010.
The bank said Canadian economic momentum is “slightly firmer”.
Chinese monthly foreign direct investment data for March showed investment of US$11.8b for the month, up from US$7.73b in February but 6.1% lower than in March 2011. Year to date, FDI is tracking 2.8% lower than it had through the first three months of 2011. This is an interesting development in light of the PBOC’s increase of the trading band for the RMB over the weekend. Rightly or wrongly, FDI is viewed as a driver of currency value, the logic being that foreign investors need to buy the investment target’s home currency in order to make their investment, thereby driving up currency value. Falling FDI implies lower currency valuation.
UK inflation for March saw the retail price index at 3.6% y/y (down from 3.7% y/y the prior month) and the CPI a touch higher than expected at 3.5% y/y (up from 3.4% y/y in February). Scotia’s UK economist Alan Clarke thinks that the sharp slowdown in UK headline inflation that was established over the last 6 months (CPI was 5.2% y/y in September) has come to a premature end, noting that with the list of upcoming price hikes (budget related tobacco increases, stamp price hikes, further petrol price increases and water bill increases) it is hard to see much further downside to prices in the next month or so. In September there will be a very helpful subtraction as the sharp increase in utility bills last autumn drops out.
The implication is that the Bank of England might need to adjust its inflation forecasts meaningfully upwards even as interest rates are very low (1%) and as it is mulling an addition to its quantitative easing program. The Monetary Policy Council is likely to fall back on its familiar sight of pen whereby it notes that the CPI gains are in ‘non-core’ categories and due to ‘temporary factors’ (if that sounds to you like recent Fed communications, you’re not alone), which offers it breathing room for additional easing in order to address lackluster economic growth in Q1 2012. Our UK economics team thinks that there is significant chance that the BoE will add £25b to its QE program in May on growth concerns.
The Reserve Bank of Australia minutes from its April meeting were released, and the bottom line is that the RBA is ready to ease monetary policy contingent on inflation remaining subdued. In the RBA’s words;
[quote]if slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for a further easing of monetary policy[/quote]
As Australia only releases inflation data on a quarterly basis and the next release is not due until April 23, “members judged it prudent to evaluate those data before considering a further policy adjustment.” This doesn’t really offer much new information, as the RBA’s statement had also emphasized the importance of the coming CPI data, however it makes the point somewhat more emphatically. Scotia’s view is that if inflation remains at its current level (2.6% y/y in Q4 2011) or moderates further, and similarly, so long as the q/q trend in CPI remains at its current low level (0.5% q/q in Q4 2011), then we see the RBA as more likely than not to move forward with further easing.
The Reserve Bank of India surprised markets by cutting repo rates by 50bps (only one forecaster in the Bloomberg consensus had anticipated a 50bps cut, although 20 had anticipated a cut of some sort). While headlines are focusing on the fact that the RBI cut rates even as inflation is running high and accelerating (+6.93% y/y in February), the reality is that food articles are the major contributor to wholesale price growth, both in terms of primary articles and in terms of manufactured products – and food prices are only weakly linked to interest rate changes
In fact, if trends in non-food primary inputs (-2.03% y/y in February) and manufactured products persist, then there might be room for further RBI easing. Whether or not the cuts will suffice to lower interest rates in India’s cash-hungry money markets is another question entirely.
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