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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Saturday, June 01, 2019

Major Central Banks: Policy Snapshot

by Century Financial in Investing

Major Central Banks: Policy Snapshot

The Federal Reserve: The United States Monetary policy is set by the Federal Reserve. Post the economic crash of 2008, the Feb has aimed took steps to help foster recovery and counter the effects of the crash. Since 2015, the Fed has been seeking to ‘normalise’the monetary policy. This means returning the short term interest rate to more normal levels and reducing the size of the Fed’s balance sheet. During the second half of 2018, the Fed gradually increased the federal fund rate bringing It to the current range of 2 ¼  – 2 ½ on the back of strong labour market and economic expansion. 

In its latest meeting in June, the Fed voted unanimously to maintain the interest rates at 2.25%-2.50% as inflation was in line with committee’s 2% objective. However, with the increased volatility expected in the second half of 2019 due to prolonged trade negotiations and global uncertainty, Chairman Jerome Powell announced that the Fed would be monitoring the global economic and financial development and be patient as it determines any future adjustments to the target rate. The Fed has also continued balance sheet normalisation since 2017, reducing its treasury and agency securities. The total assets declined by $260 billion ending the period close to $4 trillion.

European Central Bank: The ECB’s primary objective is to maintain price stability by keeping inflation rates below but close to 2%. After the ECB meeting in June, it was announced that the interest rates will remain unchanged with rate on marginal lending facility at 0.25% and rates on the deposit facility at -0.40%. The ECB has continued with its trend of keeping interest rates relatively low and negative in order to combat low inflation and a deflationary spiral. This is due to the fragile state of the European economy, with the ECB cutting it’s already dismal growth forecast of 1.7% down to 1.1%. ECB’s President Mario Draghi to step down later this year, but his replacement Christine Lagarde, currently serving as Managing Director and Chairwoman of the International Monetary Fund, is likely to offer policy continuity.  

Chinese Central Bank: The People’s Bank of China, China’s central bank announced it would maintain a prudent monetary policy in a bid to maintain the stability of the Chinese currency. At a quarterly meeting earlier in the year, the Chinese policy that always had terms ‘neutral’ and ‘prudent’ removed them, indicating quantitative easing could be in the offing. The Central Bank has cut the amount of reserves the banks need to set aside five times in the last year to increase lending to small and medium businesses.

China’s recent worries have been compounded by the Trade War with the US, but China’s reluctance to back down has been supported by its Central Bank. The PBOC Governor Yi Gang signalled that there was tremendous room for policy adjustment if trade war deepens, suggesting he is not opposed to cutting interest rates.

Indian Central Bank: The Reserve Bank of India (RBI) is the central bank of India. In early June the six member monetary policy committee decide to slash the repo rate at which it lends to the commercial banks to 5.75% from 6%. The RBI Governor Shaktikanta Das said that this is in line with the medium term inflation target of 4% as well as the objective of supporting growth. This rate cut means that the repo rate has dropped to its lowest level since 2010 and should increase liquidity within the economy. The RBI also changed its stance from ‘neutral’ to ‘accommodative’ in light of a slowdown to further comfort investors.

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