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US Fed, ECB, BOJ three banks, three policies

posted onJune 15, 2018

The U.S. Federal Reserve raised its benchmark interest rate for the second time this year and indicated that two more increases are likely by the end of 2018- one more than it had previously forecast.

The move pushes the funds rate target to 1.75 percent to 2 percent, as universally expected, and means consumers and businesses will face higher loan rates over time. It was the Fed’s seventh rate increase since 2015. The central bank also pointed to another three rate rises in 2019. 

At a news conference on Wednesday 13 June, Jerome Powell, who succeeded Janet Yellen as chairman in February, explained why the bank took such a decision.

"The economy is doing very well ... most people who want to find jobs are finding them. Unemployment and inflation are low," he said

The pace of U.S. economy has been accelerating for the last seven quarters with real gross domestic product growth of  2.8 percent in the first quarter of 2018. Unemployment rate has dropped in the last two months to hit 3.8 percent in May- a level reached only twice before in the past half-century.

The Fed's new forecast also showed inflation inching up only slightly over the next 2 1/2 years. The Fed has long aimed for 2 percent inflation, a level policymakers think is vital for healthy economic growth.

US Federal Reserve Chairman Jerome Powell
U.S. Federal Reserve Chairman Jerome Powell

ECB sets end-date for its massive QE

The European Central Bank laid out plans to phase out  its €2.4tn bond-buying programme, also known as quantitative easing (QE), by the end of the year. 

The ECB’s policy decisions were taken unanimously at a meeting in Riga on Thursday June 14, one of the occasional sessions held outside Frankfurt, president Mario Draghi announced. 

The ECB is currently boosting the eurozone money supply by buying €30bn of assets monthly, but this will be halved to €15bn after September and ended completely  after the end of the year.

The QE programme started in March 2015 to stimulate the eurozone economy. Since then over two trillion euros were pumped into the 19-nation single currency area and interest rates have been held at or near zero. 

The ECB’s latest move, follows strong pressure from some eurozone countries, led by Germany, that were uncomfortable about the more than €2.4tn of assets accumulated during the QE programme. in an attempt to fight off another economic downturn. 

Draghi said at the end of the meeting of the bank’s governing council that the QE programme had succeeded and that long-term inflation projections were within the bank's target of just under two percent. 

ECB President Mario Draghi
ECB President Mario Draghi 

The ECB chief admitted that the eurozone recovery has slowed recently but he said underlying growth remained strong.

The eurozone grew 2.3 per cent in 2017. Unsurprisingly, after months of poor economic data the ECB has revised down its growth forecast for 2018 to 2.1 per cent from 2.4 per cent. It still expected growth of 1.9 per cent in 2019 and 1.7 per cent in 2020. The central bank added that it expected inflation to hit 1.7 per cent this year, in 2019 and 2020. Three months ago, its forecasts showed inflation hitting  only 1.4 per cent this year and next, before rising to 1.7 per cent in 2020.

The ECB added that it  expected key lending rates to remain at their present levels until next summer at the earliest. The benchmark main refinancing rate remains at zero and the deposit rate at minus 0.4 per cent. 

“We decided to keep the key ECB interest rates unchanged and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path,” Draghi said.

Bank of Japan Governor Haruhiko Kuroda
Bank of Japan Governor Haruhiko Kuroda

BOJ  keeps its foot on the easing pedal 

The Bank of Japan on Friday 15 June said it would keep its ultra-loose monetary policy steady which was in line with market expectations. 

Governor Haruhiko Kuroda and his board members decided to maintain the short-term interest rate target at minus 0.1 percent and the yield on benchmark 10-year Japanese government bonds near zero.

“Japan’s economy is seeing labor markets tighten and the output gap improving, but prices aren’t rising much. As such, it’s most appropriate to patiently maintain our powerful monetary easing,” Kuroda told a news conference. 

The central bank also downgraded its assessment on inflation, in a fresh blow to its long-held 2 percent target. “On the price front, the year-on-year rate of change in the consumer price index is in the range of 0.5-1.0 percent” the BOJ said in a statement.  Earlier, in the last quarterly outlook report, the bank projected inflation to move around 1 percent. Inflation in April slowed for a second straight month, to 0.7%. 

Annual inflation is expected to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations, the bank said.

Although, Japan's economy is expanding moderately and is forecast to continue its moderate expansion, “the bank will continue with its quantitative and qualitative monetary easing with yield-curve control ... as long as it is necessary," the policy board' s statement reads.

The move contrasts the American and European central banks' decisions to resort to tightening which signaled a break from policies deployed to battle the 2007-2009 financial crisis. 

The Asian nation is over four years into an aggressive stimulus program designed to kickstart the struggling economy and help hit the ambitious inflation target of 2 percent. 

That rounded up a week that had been full of central bank meetings. The problem is not only the interest rates. Risks to the economic outlook including high oil prices, political turmoil and international trade conflicts all threaten to weigh on growth. Maybe banks cant see the forest for the trees? "Major central banks [are] slowly taking away the punch bowls but it's very gradual and there is still lots of punch around," Shane Oliver, head of investment strategy at AMP Capital, said in a note. 

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