U.S. Fed, BoE at crossroads
LENDING RATES
OTTAWA • Two of the world’s most powerful central banks will likely find themselves at odds this week.
The U. S. Federal Reserve is expected on Wednesday to maintain its current interest rate level, while focusing on gradually tightening borrowing costs as the economy improves — although the next hike may still be some ways off.
The Bank of England, meanwhile, is considering the threat of a “Leave” victory in June’s referendum on a U. K. break from the European Union — a concern that could prompt policy-makers to pre-emptively cut their key lending rate on Thursday, or wait until after the “Brexit” vote.
As for the Bank of Japan, policy-makers in the world’s third- biggest economy left their main interest level as-is on Tuesday.
The U. S. Fed, led by chairwoman Janet Yellen, is still following its so- called “dot plot” — a chart of 17 policymakers’ predictions over the past four years of where their benchmark rate is headed.
The central bank’s rate is now between a range of 0.25 to 0.5 per cent, where it has been since December.
Since then, “the data has been mixed to positive, but nothing would suggest that they should completely put a break on monetary policy,” said Charles St- Arnaud, an economist at Nomura Global Research in London.
And at this time, Yellen and her Fed colleagues are not in a hurry to adjust lending levels.
“The core message will still be the same: expansion is still going on,” said St- Arnaud, who was previously based in New York. “There has still been some volatility and some risks, but the basic message is still the same.”
Michael Gregory, deputy chief economist and head of U. S. economics at BMO Capital Markets, said he’ll be watching for “two big things” on Wednesday.
“I do think they will say that the risks are still nearly balanced,” he said. But instead of projecting four rate increases this year, “I think what we will see is a shift down to only three for this year, and possibly still four for next year.”
The Fed has talked about an eventual steady interest rate of about 3.5 per cent, he said. “I suspect that is going to fall too, to about 3.25 per cent.”
The U. S. decision will come one day before the Bank of England announces it’s latest rate decision.
Peter Dixon, an economist at Commerzbank AG in London, said “a vote for Brexit might change the landscape and tip the balance in favour of easing, but this is something we will only be able to evaluate properly after the referendum.”
“So long as growth holds up and inflation doesn’t go into reverse, I would expect the ( Monetary Policy Committee) to stand pat,” he told Bloomberg News. The Bank of England rate has been at a record low 0.5 per cent for nearly seven years.
St- Arnaud, in London, agrees that there will be no rate decision on their side until after the Brexit vote.
“Until then, we’ll stay on hold. They ( BoE Governor Mark Carney and his policymakers) probably wouldn’t want to rock the boat,” St-Arnaud said.
“We’ll probably have some discussion about ‘ maybe rate hikes are needed.’ They might have a dissenter or two. But overall, I don’t think they would want to signal too much through monetary policy before the Brexit vote.”
Meanwhile on Tuesday, the Bank of Japan kept its reserves deposit rate at negative 0.1 per cent — as was widely expected. The BoJ caught world markets off guard in January when it made the move to negative rates.
“They’re not in a rush to do more,” St- Arnaud said. “They will continue to assess the impact of negative rates on the economy before they make another decision.”