Greece may be dominating the headlines, but this week the more significant news could be found on page two of the business section, as three central banks aligned rates, but for very different reasons.
Let’s start with the less heartening news. The Bank of Canada cut its overnight target rate by 25 basis points to 0.50 percent – a five-year low – citing disappointing growth in the first half of 2015, as well as inflation well under its 2 percent target. It slashed growth expectations for this year from 1.9 percent to 1.1 percent, citing the low price of oil and its “atrocious” effect on the economy, according to Bank of Canada Governor Stephen Poloz.
It was a very different story in the U.K. Bank of England Governor Mark Carney – previous governor of the Bank of Canada – indicated earlier this week that rate increases are closer than one might think. The Bank of England has had rates at a record low of 0.5 percent since March 2009. The data supporting this view is decidedly mixed, but like U.S. Federal Reserve Chairwoman Janet Yellen, Carney emphasized that any rate rises are data-dependent and gradual.
Carney must have taken great comfort in Yellen’s Congressional testimony this week, with its upbeat portrayal of the U.S. economy. Yellen again signaled to markets that rates will rise this year from the record low of 0.25 percent, with some analysts predicting 0.50 percent in September. This relieves Carney of some of the pressure of being the lone major central bank in rate hiking mode, and spreads the effects of higher rates across a broader swath of financial activity.
So we see that central bank policy seems to be aligning around 0.50 percent – a sort of economic alignment of financial planetary orbits. The difference is that two of these central banks – the U.S. and the U.K. – are rather proud of their economies and need to normalize policy while the Bank of Canada seems to be entering into what it hopes is a temporary setback for the Canadian economy.
My View: I understand Poloz’s attempt at financial stimulus and am encouraged by what seems to be a normalization of policy by the U.S. Fed and the Bank of England. Both of those economies have recovered from the troubles of the last few years and policy normalization is another step in cementing that perception in the global economy.
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