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Wednesday, June 02, 2010
Monetary Policy Update
RBA & BoC Monetary Policy
Monday May 31st, the Reserve Bank of Australia left its overnight target rate unchanged at 4.5%. June 1st, the Bank of Canada increased its target overnight rate from 0.25 to 0.50%. Both decisions were in-line with expectations. Both statements took a notably cautious turn from previously more optimistic language. The BoC noted an increasingly uneven global recovery with strong momentum from emerging markets and advanced economies still dependent on monetary and fiscal stimulus. Domestically Canada remains solid, although after a print of 6.1% in Q1 2010 GDP, household spending is expected to decelerate. CPI is now in-line with BoC’s April projections. Given renewed global growth concerns and lower energy prices, there is no reason to expect CPI to rise above projections and out of the BoC’s target band. Based on the statement, “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.” we do not expect another increase in the overnight rate anytime soon. A trend higher is establishing itself in USD/CAD. With BoC on hold, catalysts will be global risk-on/off trade and U.S. rates. Near term USD/CAD should ease lower as equities rebound from May lows, but USD strength should be the trend through next 3-6 months. The RBA statement was similarly cautious. The Bank expects growth to be “at about trend pace” in 2010 rather than “slightly above” in its previous statement. It also noted that Asia growth has been quite strong and may need to moderate in the year ahead. Domestically, Australia remains solid, but is exposed to any slowing of exports. Housing finance data are also showing signs of slowing, reflecting the impact of rising interest rates since 2009.
Philip Dunham email@example.com (985)789-5445
RBA overnight rate unchanged at 4.50% BoC raises overnight rate from 0.25% to 0.50%
Monetary Policy Update P a g e |1
TDL Research | Monetary Policy Update
DL | davianletter.com
Wednesday, June 02, 2010 Yield Curve Canada (Weekly)
2.00 Redemption Yield 1.00
0.00 May-09 Jun-09 Jul-09 Jul-09 Aug-09 Sep-09 Sep-09 Oct-09 Nov-09 Dec-09 7 Year Jan-10 Feb-10 Feb-10 Mar-10 Apr-10 Apr-10 May-10 4 Year
10 Years Maturity
Source - Datastream
Yield Curve Australia (Weekly)
6.00 5.00 4.00 3.00 Redemption Yield 2.00 1.00 0.00 May-09 Jun-09 Jul-09 Jul-09 Aug-09 Sep-09 Sep-09 Oct-09 Nov-09 Dec-09 7 Year Jan-10 Feb-10 Feb-10 Mar-10 Apr-10 Apr-10 May-10 4 Year 10 Years Maturity
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DL | davianletter.com
RBA Statement and Changes from Prior Meeting
Wednesday, June 02, 2010
Number 2010-11 Date 1 June 2010 Embargo For Immediate Release
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to raiseleave the cash rate by 25 basis points tounchanged at 4.5 per cent, effective 5 May 2010.. Recently, forecastsSince the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels. European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time. The effects of these various factors on the world GDP growth have been revised up again, and economy will need to remain under review. At this stage, global growth is still expected to be at about trend pace or a little above in 2010. Conditions in Europe remain quite overall have been relatively weak, though recent data suggest and the foreshadowed budgetary tightening will probably mean that this will continue, but growth is becoming more established in North America. In Asia, where financial sectors are not impaired, growth has continued to be quite strong, contributing to pressure on prices for raw materials. The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies and may need to moderate in the year ahead. Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks. This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe. Australia’s In Australia, with the high level of the terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008. This will to add to incomes and foster a build-up in investment in the resources sector. Under these conditionsdemand, output growth over the year ahead is likely to exceed that seen last yearbe about trend, even though the effects of earlier expansionary policy measures will be diminishing. The process of business sector deleveraging is moderating, with business credit stabilising and indications that lenders are starting to become more willing to lend to some borrowers, though credit conditions for some sectors remain difficult. Credit outstanding for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months.
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DL | davianletter.com
Wednesday, June 02, 2010 Recent data on inflation confirm that it has declined from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand. In both underlying and CPI terms, inflation over the most recent 12 months was around 3 per cent. Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation nowInflation appears likely to be in the upper half of the target zone over the comingnext year.
With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent withConsistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers being close to theare around their average experience over levels of the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents, which is a significant adjustment from the very expansionary settings reached a year ago. The Board will continue to assess prospects for demand and inflation, and setTaking all the available information into account, the Board views this setting of monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time.appropriate for the near term.
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DL | davianletter.com
BoC Statement and Changes from Prior Meeting
FOR IMMEDIATE RELEASE 20 April1 June 2010
Wednesday, June 02, 2010
CONTACT: Jeremy Harrison 613 782-8782
Bank of Canada maintainsincreases overnight rate target atto 1/42 per cent; removes conditional commitment and reestablishes normal functioning of the overnight market
OTTAWA —– The Bank of Canada today announced that it is maintainingraising its target for the overnight rate atby one-quarter of one percentage point to 1/42 per cent. The Bank Rate is unchanged at 1/2correspondingly raised to 3/4 per cent and the deposit rate is 1/4 per centkept at 1/4 per cent, thus reestablishing the normal operating band of 50 basis points for the overnight rate. Global economic growth has been somewhat stronger than projected, with momentum in emerging-market economies increasing noticeably. Exceptional stimulus from monetary and fiscal policies continues to provide important support in many countries. The recovery in the major advanced economies is still expected to be relatively subdued, reflecting ongoing balance sheet adjustments and the gradual withdrawal of fiscal stimulus commencing later this year. Despite recent progress, considerable uncertainty remains about the durability of the global recovery. In Canada, the economic recovery is proceeding somewhat more rapidly than the Bank had projected in its January Monetary Policy Report (MPR). The profile for growth is more front-loaded than that presented in the January MPR. The Bank now projects that the economy will grow by 3.7 per cent in 2010 before slowing to 3.1 per cent in 2011 and 1.9 per cent in 2012. This profile reflects stronger near-term global growth, very strong housing activity in Canada, and the Bank’s assessment that policy stimulus resulted in more expenditures being brought forward in late 2009 and early 2010 than expected. At the same time, the persistent strength of the Canadian dollar, Canada’s poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as significant drags on economic activity in Canada. The Bank expects the economy to return to full capacity in the second quarter of 2011. The global economic recovery is proceeding but is increasingly uneven across countries, with strong momentum in emerging market economies, some consolidation of the recovery in the United States, Japan and other industrialized economies, and the possibility of renewed weakness in Europe. The required rebalancing of global growth has not yet materialized. In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus. In general, broad forces of household, bank, and sovereign deleveraging will add to the variability, and temper the pace, of global growth. Recent tensions in Europe are likely to result in higher borrowing costs and more rapid tightening of fiscal policy in some countries – an important downside risk identified in the April Monetary Policy Report (MPR). Thus far, the spillover into Canada from events in Europe has been limited to a modest fall in commodity prices and some tightening of financial conditions. Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed. Going forward, household spending is expected to decelerate to a pace more consistent with income growth. The anticipated pickup in business investment will be important for a more balanced recovery.
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DL | davianletter.com
Wednesday, June 02, 2010 CPI inflation has been in line with the Bank’s April projections. The outlook for inflation reflects the combined influences of strongerstrong domestic demand, slowing wage growth, and overall excess supply. Core inflation, which has been somewhat firmer than projected in January, is expected to ease slightly in
In this context, the Bank has decided to raise the target for the second quarter of 2010 as the effect of temporary factors dissipates, and to remain near 2 per cent throughout the rest of the projection period. Total CPI inflation is expected to be slightly higher than overnight rate to 1/2 per cent over the coming year, before returning to the target in the second half of 2011.and to re-establish the normal functioning of the overnight market. In response to the sharp, synchronous global recession, the Bank lowered its target rate rapidly over the course of 2008 and early 2009 to its lowest possible level. With its conditional commitment introduced in April 2009, the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target. In accordance with the removal of the conditional commitment, there will be no additional term Purchase and Resale Agreements issued by the Bank. This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery. Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.
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DL | davianletter.com
Wednesday, June 02, 2010
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