venerdì 12 febbraio 2010

Central Bank Monitor: BoE and Riksbank on the spotlight

Bank of England:
At the press conference on the Inflation Report, the BoE’s Governor King confirmed that the decision to forestall purchasing government bonds was not definitive, and that its extension could be decided if consumer prices became worse than previously estimated. As for the projections on economic activity and inflation, the BoE has slightly lowered its estimates on GDP growth and raised its estimates on inflation in the short term, vis-à-vis November’s Inflation Report. The growth rate of GDP is projected to be about 3% y/y in late 2010, and to surge at the same pace in 2011 should interest rates coincide with market expectations, or scend by 4% should rates remain steady at 0.5%. Nonetheless, Governor King stressed that the British economy will not recover the pre-crisis growth trend for many years. Inflation is foreseen to breach 3% y/y during the first part of 2010, probably in January, mainly due to the disappearance of the temporary VAT reduction. Towards the end of 2010, inflation should submerge below 1% and should not buoy up to 2%, the targeted high tide in two years. With inflation expected to remain below the 2% mark at a two-year horizon, a wide output gap expected for the long haul, and a fiscal policy that could become more restrictive in the coming months, we think that the Bank of England should find little reason to raise rates substantially in the near future. We pencil in the BoE to raise rates only by the end of 2010 and only after the Fed and the ECB have decided on a similar action.

As widely expected the Riksbank left rates level at 0.25% at the end of last week’s monetary policy meeting. In the Monetary Policy Report, the Swedish Central Bank revised the CPI projection for 2010 upwards, from 0.8% to 1.6%; and slightly downwards for both 2011 (from 3% to 2.9%) and 2012 (from 3.6% to 3.1%). As regards economic growth, the GDP is expected to climb by 2.5% in 2010 against the 2.7% projected in December’s Monetary Policy Report update. This is the result of both the improved functioning of financial markets and positive economic indicators, signaling that economic recovery stands on much firmer ground. The Riksbank anticipated monetary policy normalization as the first rate increase in now expected during the summer or early autumn (in December it was expected in autumn). At the same time, the current assessment is that the Repo Rate increase may occur more gradually and its forecast in the longer term has therefore been adjusted downwards slightly. The Repo Rate is expected to grow to 1.25% in Q1 2011 (previous estimate at 1%) and to rise to 3% only at the end of 2011 and not in Q3 2011 as previously expected. The real Repo Rate has been revised upwards, but will remain negative during 2010.

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