What the Central Banks did this month

Australia:The Reserve Bank of Australia (RBA) kept rates on hold at +4.75% as widely expected. Reactions were muted with the AUD rates market pricing for RBA rate cuts over the next 12 months unchanged around 129bp. Importantly, the RBA removed the comment that it is appropriate for monetary policy to exert a degree of restraint. While it remained concerned about the medium-term outlook for inflation, a key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation.

Sweden:The Riksbank kept the repo rate unchanged +2.25%, but remained fairly “hawkish”. The statement cited concerns over public finances abroad and deteriorated global growth prospects as reasons for postponing rate hikes. The new rate path projection shows rates on hold till early next year. The less dovish tone of the Riksbank coupled with the decision by the SNB to put a floor under EURCHF has fueled demand for Scandinavian currencies.

Japan: The BoJ left policy unchanged, making no changes to its asset purchase program. The yen could now become a major beneficiary of the SNB’s decision to cap the CHF. Japan will being seeking support at this week’s G7 meet.

Canada: The BoC held its key policy rate steady (+1%) and has backed away from previous signals of rate hikes, stating that the need to raise borrowing costs has ‘diminished’ as a slowing US and global economy and a strong currency drag on exports, the Euro-zone debt crisis intensifies and financial conditions tighten.

Korea: Not shifting to neutral yet. BoK kept the policy rates on hold at +3.25%. The policy statement indicated a ‘heightened sense of caution from external developments’. Little change to its domestic outlook and concerns that price pressures remain elevated. BoK Governor Kim said that the monetary committee did not discuss possible rate cuts. Their focus remains on controlling inflation, in part through a stronger won, remains intact.

INDIA: BI kept policy rates unchanged at +6.75%. Their comments have been generally supportive of external inflows. The central bank is expecting growth to be strong and balance of payment surplus robust and for the IDR to continue appreciating.This would suggest that the BI is likely to continue preferring IDR strength to play a leading role in moderating the recent rise in inflationary pressure.

Malaysia: BNM kept rates on hold at +3.0%. The central bank again cited the increased downside risk from external demand to the economy. While inflation is likely to be a concern, it has likely peaked and may by moderated by the uncertain growth prospect. Analysts expect the BNM to remain on hold for longer and that the FX policy is increasing turning against significant MYR strength.

Philippines: Shifting to neutral. The BSP kept rates on hold at +4.5% today. The central bank noted in the post policy statement that growth is more of a concern than inflation and that inflation is likely to remain manageable. BSP Deputy Governor Guinigundo also said that it sees no urgency to change the course of its monetary policy.

Korea: Not shifting to neutral yet. BoK kept the policy rates on hold at +3.25%. The policy statement indicated a heightened sense of caution from external developments. BoK Governor Kim said that the monetary committee did not discuss possible rate cuts, which suggests that the policy bias has not shifted yet.

EU and UK:Trichet gave investors an official warning that the Euro-zone’s economy will grow more slowly than previously expected and stated that the region faces ‘intensified downside risks’, enough of a reason for both the BoE and ECB to keep rates on hold at +0.5% and +1.5% respectively. The MPC also left its asset purchase facility on hold at +200b.

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