Central Bank U-Turns Look Inevitable

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Central Bank U-Turns Look Inevitable
Central Bank U-Turns Look Inevitable

Central Bank U-Turns Look Inevitable

Key Central Bank’s across the globe are in action this week. The Reserve Bank of Australia (RBA) reports it’s rates decision in the early hours of tomorrow morning, the Bank of Canada (BOC) report’s on Wednesday while the European Central Bank and the Bank of England will make their interest rate decisions known on Thursday. One month ago it seemed easy to predict the actions of these monetary authorities. The constantly changing economic situation across the globe however would have rendered these predictions void as at least 2 of these 4 Central Banks now look set to row back on their recent rhetoric.

The Australian authorities are facing a challenging situation as falling unemployment has recently taken an about turn. January’s 6% rate surprised many, not least the RBA, by adding a 20 point increase where a further fall was expected. Added to the tribulations of the Australian policy makers is the recent sharp rise in inflation. The annualized consumer price index is now running at 2.7%, up from a previous figure of 2.2%.

The RBA had been indicating that it would hike it’s 2.5% official reference rate at this week’s meeting in a bid to cool what it would have considered a heating economy. The unemployment situation has however thrown a curve ball, there is now very little scope for a rate rise in Australia any time soon.

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In Europe the ECB is facing almost the opposite problem. Granted, Eurozone unemployment is in double figures but this a quirk of the open border labor market, performing economies within the bloc often tolerate a certain level ‘black economic activity’ which distorts the labor market figures by up to 5%. The ECB’s primary concern over the past several months has been stubbornly low inflation, concerning to the point that deflation looked like a real and dangerous prospect.

The ECB was this week set to bow to pressure to further cut the historically low base rate in order to stimulate inflation. However a surprisingly high Eurozone CPI figure late last week confirmed a halt to the deflationary slide, this offers some breathing room to the ECB who are now unlikely cut rates at this week’s meeting, or for that matter at any point in foreseeable future.

To contact the reporter of this story: James Brennan at james@forexminute.com