What to Expect for This Meeting and the Implication for New Zealand Dollar

However when it comes down to it, the economy has not been negatively affected enough by the strong currency to warrant a rate cut but we do expect the RBNZ to say that rates will remain “at or below” current levels until the end of the year and reiterate that rates could still come down. The goal of the RBNZ’s dovish comments would be only to curb gains in the kiwi. For the forseeable future, the RBNZ will maintain their dovish stance and remain on the sidelines. A rate hike in New Zealand will only come after a rate hike from Australia. Dovish comments could temporarily weigh on the NZD/USD but as we have seen in the past, it should prevent the currency pair from hitting new yearly highs. 

What Happened at the Last Meeting?

The Bank of England shocked the market last month by increasing their Quantitative Easing program by GBP50 billion to GBP175B. Going into the meeting, there was only a minor chance that the central bank would raise their program by the remaining allocation of GBP25 billion. Instead, they tapped the current remittance and asked for another GBP25B from the Chancellor. This aggressive action indicates that the BoE is serious about not engineering just any recovery, but a strong one.  The minutes from the BoE meeting also revealed that some members of the monetary policy committee wanted to increase the program by an even more aggressive GBP75 billion. Despite improvements in economic data, weak credit growth and the potential for additional spare capacity has been major concern. The BoE downplayed the improvements in PMI and instead warned that the recession “appears to have been deeper than previously thought.”  Of all the major central banks, the Bank of England is the most dovish. 

How Has the Economy Changed Since the Meeting?

Since the last monetary policy meeting, economic indicators from the U.K. economy have been mixed. Inflationary pressures remain soft, the labor market has improved but it  has not translated into stronger consumer spending. Activity in the service sector continued to expand but the manufacturing sector returned to contraction. The car scrappage program has helped to boost production and the economy is recovering but we have not seen the broad based improvement that the Bank of England may be looking for. 

 

 

What to Expect for This Meeting and the Implication for British Pound

Having increased their Quantitative Easing program just last month, we expect the Bank of England to simply vote to continue with their asset purchase program. Interest rates will be left unchanged at 0.25 percent, but it when it comes to the BoE, we have been accustomed to surprises and given the discussions at the previous monetary policy meeting, the risks still favor more Quantitative Easing. Look for any hints in the upcoming monetary policy statement. We expect the British pound to sell off ahead of the release but the reaction following the meeting will be dependent upon the degree of the central bank’s dovishness.  

What Happened at the Last Meeting?

The last time the Bank of Canada made a monetary policy announcement was on July 21st. At the time, the central bank left interest rates unchanged at a record low of 0.25 percent but surprised traders with their relatively optimistic comments. Although the BoC admits that the strength of the Canadian dollar "significantly" moderates growth, they revised up their 2009 growth forecasts and said the risks to the economy are roughly balanced. In fact, they were so positive that they reduced the size of their PRA facilities (Term Purchase and Resale Agreement). By cutting this liquidity facility, the Bank of Canada in effect reduced stimulus, something a central bank would only do if they truly believed that the worse is over. The statement made little mention of the deterioration in the labor market and retail sales and instead focused on the signs of improvement abroad and the rebound in consumer and business confidence. In 2 years time, the central bank expects the economy to be back at capacity and for everything to return to normal. 

How Has the Economy Changed Since the Meeting?

Since the last monetary policy meeting, we have seen a gradual improvement in the Canadian economy.   Even though the unemployment rate has risen, there was growth in the month of August, a big departure from other countries. Retail sales also increased while growth turned positive in June. The trade deficit has narrowed and inflationary pressures have subsided. Despite the reasons for cheer, there are still holes in Canada’s economy with part time jobs replacing full time jobs and hours worked falling.  Going into this monetary policy meeting, the Bank of Canada does not have enough reasons to grow more hawkish or dovish. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What to Expect for This Meeting and the Implication for Canadian Dollar

The Bank of Canada is not in a rush to raise interest rates and there is certainly no need for them to reduce rates. Therefore we expect the BoC to remain on hold. The central bank may tone down their optimism, which would bearish for the Canadian dollar but we do not expect them to rock the boat at the point in time. The BoC announcement should be relatively uneventful.