Central Bank Activity Summary

US Federal Reserve

The recent US economic data has looked sharp, and has raised speculation that the Fed might wind up its current round of QE, which involves the purchase of $85 billion in assets each month. Although Fed Chair Ben Bernanke and Vice-Chair Janet Yellen have recently declared that QE will continue, evidence of a stronger recovery would put pressure on the Fed to reconsider. If Friday’s key employment data beats expectations, there will be more pressure on the Federal Reserve to wind down or at least modify its current stimulus package.

Charles Plosser who is not a voting member in the Federal Open Committee this year is adding his voice to Dallas Fed President Fisher as the two officials who would reduce the size of the QE program sooner rather than later.

“I would like the FOMC to begin to taper these purchases with an aim toward ending them before the end of the year,” Plosser told an economic development conference in this small southern Pennsylvania city.


Bank of Japan

The Japanese central bank, the Bank of Japan (BOJ), on Thursday ended its last policy meeting under the outgoing governor Masaaki Shirakawa, without releasing any new policies. Shirakawa will resign on March 19 along with his two deputies and the Japanese Diet is mulling whether to approve the government ‘s nomination of Asian Development Bank President Haruhiko Kuroda as next BOJ chief.

The central bank kept its monetary policy unchanged as it is likely to continue assessing the impact of the 2-percent inflation target introduced by the BOJ in January to curb deflation.

Meanwhile, the central bank also upgraded its assessment of Japan’s economy and said it has stopped weakening.


Bank of England

The BOE maintained interest rates as well as Asset Level purchases. The interest rate level decision was widely expected, but there was some talk of an increased QE, as some BOE members, including Governor King had voted in favour of increasing asset purchases in order to aid the struggling UK economy. In the end, the BOE voted to maintain QE at the present level of 375 billion pounds. There are no changes expected until Mark Carney takes over from Sir Mervyn King in July.

European Central Bank

As expected, the ECB maintained interest rates at 0.75% on Thursday. ECB head Mario Draghi reiterated that he expected the Eurozone economy to turn the corner in 2013, but called upon bloc members to implement structural reforms to their economies. He also stated that the ECB’s “monetary policy stance will remain accommodative”. The markets clearly liked what they heard, as the euro recoved close to one cent since the rate announcement was made.

At Thursday’s ECB press conference, Mario Draghi tried to some optimistic about developments in Italy, but it’s difficult to downplay the political crisis, which continues to paralyze the Eurozone’s third largest economy.


Bank of Canada

Governor Mark Carney used soft language about tighter policy for the second meeting in a row, saying inflation will “remain low in the near term‘‘ in an economy with ‘‘material excess capacity.’’ The central bank kept its benchmark rate at 1 percent as the market forecasted. GDP and consumer prices have risen less than expected. The fact that this is the second to last rate announcement for Governor Carney makes it less likely there will be bold policy changes as he readies himself for the Bank of England job in the summer.



Reserve Bank of Australia

As expected the Reserve Bank of Australia left interest rates at their current level of 3.0%. In the accompanying statement, Governor Glenn Stevens reiterated that AUD is still “higher than might have been expected”, despite significant easing in 2012. Full impact of 2012 rate cuts will “take more time to become apparent”, though RBA has been afforded scope to ease “should that be necessary” due to inflation risks lowering.

Outlook of Australia is also less positive, with employment looking softer recently. Return to “very strong growth” is unlikely, and investments in resources sector has peaked, while other sectors remain subdued. Global growth is forecast to be “a little below average”, while China remain “robust” and US and Europe have stabilized.


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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza