Bank Research Consensus Weekly 05-04-09

Published May 4th, 2009 - 02:46 GMT

Committing to low rates for longer: Apart from slashing short-term policy rates – the conventional tool of monetary policy – major central banks have adopted various unconventional monetary policy tools in the ongoing turmoil. Quantitative easing and credit easing in their various forms have understandably garnered most attention – for our latest update on these, see last week’s The Global Monetary Analyst.

Stephen Roach, Head Economist, Morgan Stanley



Weekly Bank Research Center 05-03-09



 

A Different Unconventional Measure

Stephen Roach, Head Economist, Morgan Stanley

Committing to low rates for longer: Apart from slashing short-term policy rates – the conventional tool of monetary policy – major central banks have adopted various unconventional monetary policy tools in the ongoing turmoil. Quantitative easing and credit easing in their various forms have understandably garnered most attention – for our latest update on these, see last week’s The Global Monetary Analyst. Today we focus on another type of unconventional policy, which seems to have become more popular with some central banks recently as they reach the effective lower bound for the policy rate – an explicit commitment to keep the policy rate low for a longer period than previously expected. Central banks that have employed this tool recently include the Fed (since December), the Bank of Canada and the Swedish Riksbank (both from last week). The ECB may follow next week. If credible, such a commitment should lower yields through the term structure and support other asset prices.

 

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ECB to Announce Non-Standard Measures

Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

We expect the ECB to cut the refinancing rate by 0.25% to 1% at its next meeting on Thursday and that this will be the end of the cutting cycle. There have been plenty of signals from members of the governing council that they are reluctant to go below 1%, although it has never been fully ruled out. Since the last meeting of the governing council Asian data have signalled the possibility of a rebound and Euroland data have become less negative too. Most importantly, confidence indicators have improved and this week’s bank lending survey showed that credit tightening is slowing (see below). There is a small risk that the ECB will use these positive developments to take a wait and see stance – they could even have ongoing discussions about the risk of over-stimulating the economy. On the other hand, the economy is still in a very bad state as emphasised by the IMF’s World Economic Outlook, published on April 23, which projected a 4.2% decline in Euroland GDP in 2009. Indeed, a lot of hard data are still in virtual free fall. We thus stick to our expectation that the ECB will cut by 0.25%.

 

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Strength in Consumption to be Short-lived

Steve Chan, Economist, TD Bank Financial Group

Although consumer spending was positive in the first quarter, this is not a trend that we expect to see continue in the near term. The increase in consumption occurred during the first two months of the year – likely due to extended holiday discounting – before resuming the downtrend again in March. This provides a weak handoff for the second quarter, which will be likely exacerbated by a further deterioration in the labour market. Following the retail sales report released earlier this month, the personal income and spending report out this week provided further evidence of the drop in spending. Personal income was down 0.3% M/M in March, and up by only 0.3% compared to year-ago levels. Personal spending slid 0.2% on the month, as consumers limited themselves to essential services. What’s more, the savings rate increased from 4.0% to 4.2% in March, suggesting that consumers are watching their spending habits closely.

 

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Compiled by: David Song, Currency Analyst and Geng Chen, Dailyfx.com

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