Federal Reserve (FED)

• Federal Funds Rate: 0.25%
• Last Change: Dec 16
• Next Decision: Sep 21
• Chairman: Ben S. Bernanke
• URL: http://www.federalreserve.gov

FED) FOMC Statement August 10, 2010

Release Date: August 10, 2010

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.

European Central Bank (ECB)

• Minimum Bid Rate: 1.00%
• Last Change: Jul 8
• Next Decision: N/A
• President: Jean-Claude Trichet
• URL: http://www.ecb.int/

(ECB) Press Conference Introductory Statement, 8 July 2010

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today's meeting, which was also attended by Commissioner Rehn.

Based on its regular economic and monetary analyses, the Governing Council views the current key ECB interest rates as appropriate. It therefore decided to leave them unchanged. Taking into account all the new information which has become available since our meeting on 10 June 2010, we continue to expect price developments to remain moderate over the policy-relevant medium-term horizon, benefiting from low domestic price pressures. The latest information has also confirmed that the economic recovery in the euro area continued in the first half of 2010. Looking ahead, we expect the euro area economy to grow at a moderate and still uneven pace, in an environment of high uncertainty. Our monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations remains of the essence.

Monetary policy will do all that is needed to maintain price stability in the euro area over the medium term. This is the necessary and central contribution that monetary policy makes to fostering sustainable economic growth, job creation and financial stability. All the non-standard measures taken during the period of acute financial market tensions, referred to as “enhanced credit support” and the Securities Markets Programme, are fully consistent with our mandate and, by construction, temporary in nature. We remain firmly committed to price stability over the medium to longer term. The monetary policy stance and the overall provision of liquidity will be adjusted as appropriate. Accordingly, the Governing Council will continue to monitor all developments over the period ahead very closely.

Let me now explain our assessment in greater detail, starting with the economic analysis. After a period of sharp decline, euro area economic activity has been expanding since mid-2009. Euro area real GDP increased, on a quarterly basis, by 0.2% in the first quarter of 2010, according to Eurostat's second estimate. The latest economic data and survey-based indicators suggest that a strengthening in economic activity took place during the spring. The Governing Council expects real GDP to grow at a moderate and still uneven pace over time and across economies and sectors of the euro area. The ongoing recovery at the global level and its impact on the demand for euro area exports, together with the accommodative monetary policy stance and the measures adopted to restore the functioning of the financial system, should provide support to the euro area economy. However, the recovery in activity is expected to be dampened by the process of balance sheet adjustment in various sectors and labour market prospects.

In the Governing Council's assessment, the risks to the economic outlook are broadly balanced, in an environment of high uncertainty. On the upside, the global economy and foreign trade may recover more strongly than projected, thereby further supporting euro area exports. On the downside, concerns remain relating to renewed tensions in financial markets, with possible further adverse effects on financing conditions and confidence. In addition, a stronger or more protracted than previously expected negative feedback loop between the real economy and the financial sector, renewed increases in oil and other commodity prices, and protectionist pressures, as well as the possibility of a disorderly correction of global imbalances, may weigh on the downside.

With regard to price developments, euro area annual HICP inflation was 1.4% in June, according to Eurostat's flash estimate, after 1.6% in May. In the next few months annual HICP inflation rates are expected to display some further volatility, with a tendency towards somewhat higher rates later in the year. Looking ahead, in 2011 inflation rates should overall remain moderate, benefiting from low domestic price pressures. Inflation expectations over the medium to longer term continue to be firmly anchored in line with the Governing Council's aim of keeping inflation rates below, but close to, 2% over the medium term.

Risks to the outlook for price developments are broadly balanced. Upside risks over the medium term relate, in particular, to the evolution of commodity prices. Furthermore, increases in indirect taxation and administered prices may be greater than currently expected, owing to the need for fiscal consolidation in the coming years. At the same time, risks to domestic price and cost developments are contained. Overall, the Governing Council will monitor closely the future evolution of all available price indicators.

Turning to the monetary analysis, the annual growth rate of M3 was unchanged at -0.2% in May 2010. The annual growth rate of loans to the private sector increased slightly further but, at 0.2%, remained weak. Together, these data continue to support the assessment that the underlying pace of monetary expansion is moderate and that inflationary pressures over the medium term are contained. Shorter-term developments in M3 and some of its components and counterparts have remained volatile and, given the continued tensions in some financial market segments, this volatility may well persist.

The previously strong impact of the interest rate constellation on monetary dynamics appears to be gradually waning. This implies that actual M3 growth is less affected than before by the downward impact of the steep yield curve and the associated allocation of funds into longer-term deposits and securities outside M3. Moreover, the impact that the narrow spreads between the interest rates paid on different M3 instruments have on shifts within M3 towards M1 should be diminishing. However, at 10.3%, annual M1 growth is still very strong.

The still weak annual growth rate of bank loans to the private sector continues to conceal countervailing developments, with positive growth in loans to households and negative growth in loans to non-financial corporations. While the monthly flow in bank loans to non-financial corporations was positive in May, in the light of the volatility observed in recent months it is too early to judge whether this signals a turning point. A lagged response of loans to non-financial corporations to developments in economic activity is a normal feature of the business cycle.

The data up to May confirm that the size of banks' overall balance sheets has increased since the turn of the year. The challenge remains for banks to expand the availability of credit to the non-financial sector when demand picks up. Where necessary, to address this challenge, banks should retain earnings, turn to the market to strengthen further their capital bases or take full advantage of government support measures for recapitalisation. In this respect, we welcome the decision announced by the European Council to publish, with the consent of the banks involved, the individual results of the stress test exercise for banks in the European Union carried out by the Committee of European Banking Supervisors (CEBS) in cooperation with the ECB. Appropriate action will have to be taken where needed. Sound balance sheets, effective risk management and transparent, robust business models are key to strengthening banks' resilience to shocks and to ensuring adequate access to finance, thereby laying the foundations for sustainable growth, job creation and financial stability.

To sum up, the current key ECB interest rates remain appropriate. Taking into account all the new information which has become available since our meeting on 10 June 2010, we continue to expect price developments to remain moderate over the policy-relevant medium-term horizon, benefiting from low domestic price pressures. The latest information has also confirmed that the economic recovery in the euro area continued in the first half of 2010. Looking ahead, we expect the euro area economy to grow at a moderate and still uneven pace, in an environment of high uncertainty. A cross-check of the outcome of our economic analysis with that of the monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations remains of the essence.

As regards fiscal policies, the focus clearly needs to be on ensuring the sustainability of public finances. In the current environment, all euro area countries must, as a minimum, comply with their fiscal consolidation plans as foreseen under the respective excessive deficit procedures. More ambitious targets, as already adopted by a number of countries, may become necessary where current plans fall short of meeting the main objective of halting and reversing the increase in the government debt ratio. Moreover, all countries must specify credible adjustment measures that are sufficient to attain their budgetary targets for 2010, 2011 and beyond, and must live up to their commitment to take additional measures, where needed, over the coming years.

For the proper functioning of the euro area, and to strengthen the prospects for higher sustainable growth, the pursuit of far-reaching structural reforms is essential. This will also support the process of fiscal consolidation. Major reforms are particularly needed in those countries that have experienced competitiveness losses in the past or that are suffering from high fiscal and external deficits. Measures should ensure a wage bargaining process that allows wages to adjust flexibly to the unemployment situation and losses in competitiveness. Reforms to strengthen productivity growth would further support the adjustment process of these economies.

Let me finally refer to the proposals submitted by the Governing Council to the Task Force on Economic Governance established by the European Council under the chairmanship of President Van Rompuy. In the view of the Governing Council, a quantum leap in terms of progress towards strengthening the institutional foundations of EMU is needed. It is essential that governance and enforcement structures in the economic policy framework of the euro area be strengthened. Reinforcing surveillance of national budgetary policies and ensuring rigorous compliance with the fiscal rules will be key. Furthermore, it is extremely important that close oversight of relative competitiveness developments be implemented and that a surveillance mechanism be established to address imbalances in the euro area countries. At the same time, it is important to establish an appropriate euro area crisis management framework that minimises moral hazard.

Bank of Japan (BOJ)

• Overnight Call Rate: 0.10%
• Last Change: Dec 19 (-20bp)
• Next Decision: Jan 26
• Governor: Masaaki Shirakawa
• URL: http://www.boj.or.jp/

(BOJ) Statement on Monetary Policy, May 21, 2010

Statement on Monetary Policy

1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote,1 to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.

2. Japan's economy is starting to recover moderately, induced by improvement in overseas economic conditions. Exports and production have been increasing mainly against a backdrop of high growth in emerging economies. In these circumstances, business fixed investment is showing signs of picking up. Private consumption, notably durable goods consumption, is picking up partly due to policy measures. Public investment is declining. Meanwhile, financial conditions, with some lingering severity, have continued to show signs of easing. The CPI (excluding fresh food) is declining on a year-on-year basis due to the substantial slack in the economy as a whole, but the moderating trend in the pace of decline has continued.

3. The Bank's baseline scenario projects that the economy is likely to be on a recovery trend. With regard to prices, based on the assumption that medium- to long-term inflation expectations remain stable, the year-on-year rate of decline in the CPI (excluding fresh food) is expected to slow as the aggregate supply and demand balance improves gradually.

4. With regard to economic activity, while there are some upside risks such as faster growth in emerging and commodity-exporting economies, there are also downside risks such as those related to international financial developments. In this regard, attention should be paid to the effects of developments regarding fiscal conditions in some European economies on international finance and the global economy. With regard to prices, there is a possibility that inflation will rise more than expected due to a rise in commodity prices brought about by higher growth rates in emerging and commodity-exporting economies, while there is also a risk that the rate of inflation might decline due, for example, to a decline in medium- to long-term inflation expectations.

5. The Bank recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability. To this end, the Bank will continue to consistently make contributions as central bank. In the conduct of monetary policy, the Bank will aim to maintain the extremely accommodative financial environment.

6. At the Monetary Policy Meeting held on April 30, 2010, with a view to strengthening the foundations for economic growth, the Bank announced to support private financial institutions in terms of fund provisioning, and has since been examining possible ways of implementation. At today's Meeting, based on a report from staff, the Bank decided to compile and announce a preliminary framework for the fund provisioning, as in the Attachment, and to examine further operational details.

Preliminary Framework for the Fund-Provisioning Measure to Facilitate Strengthening of the Foundations for Economic Growth

1. Eligible Counterparties

Financial institutions that are already counterparties in the Bank's Funds-Supplying Operations against Pooled Collateral at All Offices and wish to be counterparties for this measure.

2. Form of Loans

Loans shall be provided against pooled collateral (the same form as the Bank's Funds-Supplying Operations against Pooled Collateral).

3. Duration of Loans

Duration of each loan shall be 1 year, in principle, and the loan can be rolled over.

4. Loan Rates

The Bank's target for the uncollateralized overnight call rate at the time of loan disbursement.

5. Amount of Loans per Counterparty

Each counterparty shall submit its plan for strengthening the foundations for economic growth to the Bank. The Bank shall provide loans to each counterparty based on its actual amount of lending and investment that were carried out under the plan.

6. Total Amount of Loans, Deadline of New Application for Loans, etc.

The Bank shall determine, at the time of commencement of this measure, the total amount of loans, the deadline of new application for loans, and the number of roll-overs possible, taking into account, for example, financial institutions' approaches to carry out lending and investment for strengthening the foundations for economic growth.

Bank of England (BOE)

• Bank Rate: 0.50%
• Last Change: July 8
• Next Decision: N/A
• Governor: Mervyn King
• URL: http://www.bankofengland.co.uk/

These are the minutes of the Monetary Policy Committee meeting held on 7 and 8 July 2010.

They are also available on the Internet

http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2010/mpc1007.pdf

The Bank of England Act 1998 gives the Bank of England operational responsibility for setting interest rates to meet the Government's inflation target. Operational decisions are taken by the Bank's Monetary Policy Committee. The Committee meets on a regular monthly basis and minutes of its meetings are released on the Wednesday of the second week after the meeting takes place. Accordingly, the minutes of the Committee meeting to be held on 4 and 5 August will be published on 18 August 2010.

MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 7 AND 8 JULY 2010

1 Before turning to its immediate policy decision, the Committee discussed financial market developments; the international economy; money, credit, demand and output; and supply, costs and prices.

Financial markets

2 Stresses in financial markets had persisted during the month. Measures of volatility and spreads on a range of riskier assets had remained high.

3 These stresses had reflected in part continuing concerns among market participants about the ability of some euro-area countries to achieve necessary fiscal consolidation. Spreads between yields on German government bonds and those of a number of euro-area governments had remained elevated. Uncertainty about the scale of banks' exposures to sovereign debt, particularly within the euro area, had continued to impair bank funding markets. The costs of both interbank funding and of new bank bond issuance had remained elevated. Capital market issuance by banks had remained low. It was unclear to what extent the uncertainty would be resolved by the publication by the Committee of European Bank Supervisors of the results of stress tests designed to assess the resilience of the EU banking sector on 23 July.

4 A range of economic data had been released during the month that were interpreted as signalling that the pace of economic recovery was likely to be slower than previously expected, particularly in the United States. But over the month as a whole, UK and US equity prices had been broadly unchanged and they had risen a little in the euro area.

5 Market participants had revised down their views of the timing and speed of the withdrawal of the exceptional monetary stimulus in the United States in the light of these data. According to dollar overnight index swaps, expected short-term interest rates one year ahead were about 15 basis points lower than a month previously. Near-term interest rate expectations had changed little over the month in the United Kingdom. Interest rates had risen slightly in the euro area, probably reflecting the fall in the amount of excess reserves within the Eurosystem following the European Central Bank's most recent market operations.

6 Yields on UK government bonds, which remained low by historical standards, had been stable following the Budget on 22 June. Over the month as a whole, yields on ten-year US and UK government bonds had declined by around 20 basis points.

7 Sterling had appreciated by nearly 4% against the dollar during the month, but was little changed against the euro. In effective terms, sterling had risen by nearly 1%.

The international economy

8 Over recent months, heightened concerns about sovereign indebtedness had prompted governments in a number of euro-area countries to accelerate their plans for fiscal consolidation. These were likely to weigh on prospects for demand growth in key UK export markets. But measures of euro-area business activity and consumer confidence, which might have been expected to provide an early indication of the economic impact of recent financial market developments, had been broadly unchanged in June.

9 In the United States, Q1 GDP growth had been revised down slightly to 0.7%. Survey indicators of activity had fallen in both the manufacturing and services sectors, although they remained at levels consistent with continuing growth. Measures of consumer confidence had been mixed, but there were signs of renewed weakness in the housing market. New home sales, housing starts and the number of new building permits had fallen. Some of that weakness was likely to reflect the ending of homebuyer tax credits in April. Non-farm payrolls had fallen in June, although that could be more than explained by the laying off of staff hired temporarily to undertake the national census: the number of private sector jobs had increased modestly.

10 Business surveys had continued to point towards robust economic growth in many parts of Asia. But some surveys had weakened a little in June in both India and China, possibly reflecting the impact of tighter policy. Reflecting strong growth in emerging market and developing economies, the IMF had revised up its most recent outlook for global growth in 2010.

11 Against the background of continued regional divergences in growth, during the month the available data and business surveys of global activity had softened. But the signal this provided about the underlying pace of the global recovery over the medium term was unclear. It was possible that they had reflected some impact from recent renewed financial market turbulence and heralded a more persistent reduction in business and consumer confidence. But it was also possible that they had reflected temporary factors. A slowing in manufacturing growth might simply have pointed towards a waning of the temporary boost to growth from the unwinding of the stock cycle.

12 Excluding food and energy prices, inflation in the United States and the euro area had been falling during 2010. Those falls had been spread across a wide range of goods and services, which might be consistent with generalised downward pressure on prices from excess capacity. Headline inflation, however, had remained higher - at around 2% in the United States and 1.5% in the euro area - boosted over recent quarters by the impact of the past increase in oil prices. Oil prices were broadly unchanged over the month.

Money, credit, demand and output

13 Credit conditions had remained tight and recent indicators had suggested a slowing in the pace of easing. Net lending by banks to individuals and non-financial firms had been weak again in May, but net recourse to equity markets by the corporate sector had increased in recent months. Evidence from the Bank's Credit Conditions Survey had suggested that lenders were expecting a further slowing in the improvement of the availability of corporate credit, and a small tightening in the availability of secured lending to households. It was likely that this had been caused in part by the recent disruption to bank funding markets, which had slowed down the issuance of longer-term bank debt required for the necessary restructuring of banks' balance sheets. An unexpected slowing in the pace at which credit conditions eased was likely to dampen demand prospects. But that impact might be mitigated by the continuing substantial financial surplus of the UK corporate sector.

14 The annual growth rate of broad money, as measured by M4 excluding the holdings of interbank intermediaries, had been estimated to have been 1.6% in May. The three-month annualised rate had risen to 9.2%, the highest since the autumn of 2007. But the significance of this pickup was unclear. The increase was mainly due to a rise in the seasonally adjusted deposits of financial companies including insurance companies and pension funds. The unadjusted data had shown a materially smaller increase, however, and it was possible there had been a change in the pattern of seasonal variation in those deposits. The deposits of households and non-financial firms were little changed in May.

15 There had been fewer official data on real and nominal activity made available this month than scheduled. Publication of the Q1 Quarterly National Accounts and associated Blue Book data by the ONS - which had been scheduled for 30 June - had been postponed until 12 July. According to the ONS, business investment was estimated to have risen by 8% in Q1, materially stronger than previously thought. In line with the usual pre-release arrangements, the Governor informed the Committee that industrial production had risen by 2.0% in the three months to May.

16 On balance, the available indicators from business surveys and reports from the Bank's Agents had softened during the past month. This accorded with the impression that a number of Committee members had gained from meetings with businesses around the United Kingdom. The manufacturing and services CIPS/Markit Purchasing Managers' Indices had fallen in June, although they had remained consistent with continued growth in output. More forward-looking indicators of business confidence and orders had fallen by rather more. The picture was not straightforward to interpret, however, and some indicators, such as total car registrations, the BCC survey's domestic and external sales balances, and the CBI Distributive Trades Survey's retail sales balance, had picked up. Taken at face value, the business surveys had pointed towards a softening in growth between the second and third quarters. But the extent to which they had indicated more persistent weakness depended on the causes of their fall, which were far from clear.

17 One possible cause of this softening was a weakening of demand in key UK export markets, particularly within the euro area. Another possibility was that the weakening in business surveys had been related to uncertainty over the impact of the Budget on 22 June: a number of the surveys had been completed before the Budget. It was possible that there would be some recovery in the surveys over the coming months as the uncertainty surrounding the Government's overall tax and spending plans had been resolved, although the precise details of public spending would not be known until the Spending Review in October.

18 A key determinant of the medium-term outlook for activity would be the response of private sector spending to news in the Budget and the prospective Spending Review. That would depend in large part upon the extent to which the sharp rise already seen in private sector saving had reflected anticipation of the impact of the fiscal consolidation on future post-tax income. Further evaluation of the impact of the Budget on the outlook for private sector saving would be required as the Committee prepared its projections and analysis for the August policy meeting and Inflation Report.

Supply, costs and prices

19 CPI inflation had fallen to 3.4% in May, in large part reflecting lower contributions from food and beverages. Following the usual pre-release arrangements, an advance estimate for twelve-month CPI inflation of 3.2% in June had been provided to the Governor ahead of publication. A detailed breakdown of these data was not yet available. Also in line with the pre-release arrangements, the Governor informed the Committee that producer input prices had fallen by 0.2% in June, reflecting in part lower oil and fuel prices. They remained over 10% higher than a year earlier. Producer output prices had fallen by 0.3% in June, their first monthly fall since November 2008.

20 Although CPI inflation had fallen by 0.5 percentage points in the past two months, it was likely to remain above the target for some months, as the impact of the past increases in indirect taxes and oil prices, and the depreciation of sterling offset downward pressure on inflation from spare capacity. It was likely that the impact of these factors on inflation would ease over coming quarters. But the increase in the standard rate of VAT to 20% from January 2011 announced in the Budget was likely to add to inflation throughout next year. It was possible that some companies may anticipate the increase by raising prices in advance.

21 The pace at which inflation returned to the target was highly uncertain, and was likely to depend upon a number of factors.

22 The impact of large changes in relative prices on the price level had obscured underlying trends in inflation. There was a wide dispersion between the different measures of UK inflation. Prices of a range of goods had been increasing by more than they had on average during the past decade, whereas prices of a range of services had been increasing by less than their average rate. That was consistent with an effect on relative prices from the fall in the exchange rate. But there had also been signs of a pickup in services inflation in recent months and it was hard to gauge with any precision the scale or timing of the net effect of those changes in relative prices on the overall price level.

23 There remained considerable uncertainty over the extent of spare capacity in the economy and the speed with which it would press down on inflation. The recent downward trends in inflation, excluding energy and food, in the United States and euro area suggested that a substantial margin of spare capacity would cause inflation to fall back in the United Kingdom too, as the impact of temporary factors wore off. But the recent resilience of UK inflation had raised the possibility that the impact of spare capacity on inflation might be weaker or operating more slowly than in the past.

24 The outlook for inflation over the medium term would depend upon the behaviour of households' and firms' inflation expectations. While most of the household surveys suggested that expectations for inflation one to two years ahead had risen over recent months, it was likely that they had been influenced by the recent outturns for inflation itself. There was less evidence of a material rise in measures of longer-term inflation expectations, which might matter more for underlying inflationary pressure. The YouGov/Citigroup measure of inflation expectations five to ten years ahead had risen in June to 3.3%, but had remained below the readings typically recorded in the years before the onset of the recession. Measures inferred from financial markets had continued to imply that market participants placed more weight on elevated inflation in the medium term than on deflation.

25 It was unlikely that an increase in inflation expectations would raise the medium-term outlook for inflation without also being associated at some point with a sustained rise in pay growth. Private sector pay settlements had remained subdued, but current elevated levels of inflation and inflation expectations posed an upside risk to future wage settlements. The outlook for pay would also depend upon the behaviour of productivity as the economy recovered, and the extent to which public sector earnings and employment affected private sector wage bargaining.

26 Total employment had increased by 5,000 in the three months to April by comparison with the previous non-overlapping quarter, according to the LFS measure, with a particularly strong increase in part-time employment. The rate of unemployment was 7.9% in the three months to April, although the more timely claimant count measure had declined further in May, its fourth consecutive monthly fall.

The immediate policy decision

27 The prospects for GDP growth had probably deteriorated a little over the month. Although consistent with continued growth, a range of survey-based measures of activity had weakened, both in the United Kingdom and overseas. It was possible that this pointed towards a temporary slackening in the momentum of the global economic recovery. But there were factors that indicated the medium-term outlook for growth might have weakened too. Although several governments had announced plans for accelerated fiscal consolidation, conditions in international financial markets had remained stressed and firms' access to capital markets impaired. It was possible that the stress tests of the resilience of the EU banking sector, scheduled for publication on 23 July, would help to improve financial market confidence, but considerable uncertainties remained. The gradual easing in credit conditions to UK households and firms, that had been under way for several months, had appeared to slow, in part reflecting recent pressures in bank funding markets. Plans for additional reductions in public spending and increases in tax had been announced in the Budget. The implications of the additional Budget measures for output were hard to gauge and would depend upon the response of the private sector. But it was likely that they had pushed down a little on the most likely path for output, while at the same time reducing the risks to growth from a sharp rise in longer-term interest rates.

28 Near-term inflation prospects had also worsened. Although CPI inflation had fallen again in June, it was likely to be higher during the remainder of 2010 than envisaged in the May Inflation Report central projection. And the increase in the standard rate of VAT to 20% announced in the Budget was likely to add to inflation, particularly in 2011. Because of that, it was increasingly likely that inflation would remain above target for some time. This followed a period of several years in which inflation had been above target for much of the time. In the light of this outlook, there was a risk that the private sector's expectations of inflation over the medium term would rise, which might necessitate tighter policy than would otherwise have been needed to meet the inflation target. But there was so far little to suggest that households' longer-term inflation expectations had increased materially, although the evidence was limited. And indicators of pay growth had remained subdued.

29 In the light of the news over the month, it seemed likely that growth would be weaker than previously expected but, at least for a while, inflation was likely to be higher. But the Committee's central view remained that the substantial margin of spare capacity was likely to persist for some time and would bear down on inflation over the medium term. There were, however, considerable uncertainties about the pace and scale of the impact of the past depreciation of sterling on the price level, about the extent of spare capacity and the strength of its influence on inflation, and about the outlook for the public's medium-term inflation expectations. It was too early to assess fully the implications for inflation of the measures announced in the Budget.

30 Against that background, the Committee assessed how the balance of risks to the inflation outlook had shifted over the past month, and what that implied for the appropriate stance of policy. Different members placed slightly different weights on the various arguments.

31 The Committee considered arguments in favour of a modest easing in the stance of monetary policy. The softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned. Pay growth had remained subdued and there was little sign of a material pickup in medium-term inflation expectations. A further modest monetary stimulus would act to offset the softening in demand prospects and make it more likely that the inflation target would be met in the medium term.

32 But there were also arguments in favour of a modest tightening in the stance of monetary policy. Inflation was likely to remain above target for some months and there was a risk that medium-term inflation expectations would rise. The resilience of inflation over recent months had suggested that the downward impact of spare capacity could be weaker than expected and this created uncertainty around the extent to which inflation would fall back in the future. Demand growth had bounced back internationally, although the geographical distribution remained uneven. The average growth rate of the main measures of UK nominal demand in recent quarters had been around or above historical rates.

33 On balance, most members thought that it was appropriate to leave the stance of monetary policy unchanged. For them, the weight of evidence from both home and abroad continued to indicate that the margin of spare capacity was likely to bear down on inflation and bring it back to the target in the medium term once the impact of temporary factors had worn off. There remained risks to this outcome to the downside, if the impact of the margin of spare capacity on inflation was greater than anticipated, and to the upside, if the private sector's expectations of inflation over the medium term rose. Against that background, the current level of Bank Rate and stock of asset purchases financed by the issuance of central bank reserves remained appropriate to meet the inflation target in the medium term. The August Inflation Report would give the Committee the opportunity to re-evaluate the medium-term outlook for inflation in the light of all the news.

34 For one member, it was appropriate to start to withdraw some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009. Economic conditions had improved over the past twelve months and the inflation outlook had shifted sufficiently to justify beginning to raise interest rates gradually.

Swiss National Bank (SNB)

• Three-Month LIBOR Target: 0.25%
• Last Change: June 17
• Next Decision: N/A
• Chairman: Jean-Pierre Roth
• URL: http://www.snb.ch/

(SNB) Monetary policy assessment of 17 June 2010

Swiss National Bank maintains its expansionary monetary policy The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Consequently, it is leaving the target range for the three-month Libor unchanged at 0.00- 0.75% and intends to hold the Libor in the lower part of the target range, at around 0.25%.

The recovery of the global economy continues and the Swiss economy is benefiting from it. Although the weakening of the euro with respect to the Swiss franc is dampening export activity, this activity is being supported by growth in foreign demand. The domestic sector is still performing favourably. For 2010, the SNB is now expecting real GDP growth of about 2.0%. In view of these pleasing developments, the deflationary risk in Switzerland has largely disappeared.

At the same time, uncertainty has increased since the last monetary policy assessment. The latest tensions on the financial markets, particularly with regard to the public finances of some individual countries, have increased the downside risks. Should these downside risks materialise and, via an appreciation of the Swiss franc, lead to a renewed threat of deflation, the SNB would take all the measures necessary to ensure price stability.

The SNB's conditional inflation forecast for 2010 and 2011 has increased slightly since March. It remains unchanged for 2012. Assuming an unchanged three-month Libor of 0.25%, average inflation for 2010 is expected to amount to 0.9%, for 2011 to 1.0% and for 2012 to 2.2%. This forecast shows that short-term price stability is guaranteed. It also shows that the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising medium and long-term price stability. The forecast is still associated with very considerable uncertainties.

Bank of Canada (BOC)

• Overnight Rate: 0.25%
• Last Change: Jul 22
• Next Decision: Sep 8
• Governor: Mark Carney
• URL: http://www.bankofcanada.ca

(BOC) Bank of Canada Increases Overnight Rate Target to 3/4 Per cent

OTTAWA - The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank's outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank's view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank's April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Information note:

A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 22 July 2010. The next scheduled date for announcing the overnight rate target is 8 September 2010.

Reserve Bank of New Zealand (RBNZ)

• Official Cash Rate: 3.00%
• Last Change: Jul 28
• Next Decision: N/A
• Governor: Glenn Stevens
• URL: http://www.rbnz.govt.nz/

(RBNZ) Reserve Bank raises OCR to 3.0 percent

The Reserve Bank today increased the Official Cash Rate (OCR) by 25 basis points to 3.0 percent.

Reserve Bank Governor Alan Bollard said: "While the outlook for economic growth has softened somewhat, it is still appropriate to continue to reduce the extraordinary level of support implemented during the 2008/09 recession.

"The world economy continues its fragile recovery. Trading partner growth has turned out stronger than we predicted, however, future prospects for growth have deteriorated. While still at high levels, our commodity prices have moderated.

"In New Zealand, domestic demand is subdued. Households are cautious, with retail spending growing only modestly, housing turnover in decline and household credit growth weak. While this caution has been evident for some time, the recent slowing in net immigration will act to further dampen consumer spending. Business investment remains very low, with corporate lending continuing to be subdued.

"The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices.

"Overall, we continue to predict respectable near-term GDP growth, with manufacturing confidence remaining elevated and forestry exports continuing to expand. An eventual recovery in business investment will assist growth over the medium term.

"Annual CPI inflation has been near 2 percent for the past five quarters. As the economy grows, inflationary pressures are expected to pick up.

"Given this, some further removal of monetary policy stimulus is appropriate at this stage. Even after today’s move, the level of the OCR is still very supportive of economic activity. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement. Our policy assessment will be continually reviewed in light of economic and financial market developments.

"The coming increase in the rate of GST and other government-related price changes are likely to temporarily push annual CPI inflation above 3 percent. The Bank does not expect this price spike to have a lasting impact on inflation. However, the price and wage setting behaviour of firms and households will be monitored for evidence of any increase in inflation expectations."