Current policy rate: 0 to 0.25%
Consensus expectation: No change to policy rate; new $500bn programme of asset purchases
Headline consumer price index: +1.1% (September)
Inflation objective: about 2 percent or a bit below
Notable special measures in operation
• Circa $2,000bn in completed asset purchases, including $1,100bn in mortgage-backed securities and $792bn in Treasuries.
• Size of the programme is currently stable. Capital payments from MBS are reinvested in Treasuries.
Points to watch
• This meeting is likely to end in QE2. See past posts on size, speed and forward guidance, plus newspaper pieces on Fed objectives, QE as a policy, committee dynamics, and an overall preview.
• Market expectations are pretty well settled
As in the rest of the world, flows of bank credit to banks and households have slowed dramatically in the eurozone during the past few years. But the official line, maintained by the European Central Bank, has been that there was no general “credit crunch” – supply side constraints that crippled the economy. Rather, the slowdown was seen as demand-led. In other words, in the deep recession nobody wanted to borrow.
The difference in tone has been striking for anyone travelling from continental Europe to the UK, where the downturn has been commonly referred to as simply “the credit crunch”.
Maybe, however, the ECB will have to eat its words?
Feel the pain and move on in the UK housing market. Specifically, set up a UK Tarp to buy troubled mortgage-backed assets from banks. That’s advice to the Bank of England from Fathom Consulting’s monetary policy forum, quoted by Stephanie Flanders.
Fathom argues that the US and UK are falling into the Japanese trap – only drip-feeding cheap debt to households rather than businesses. In so doing, they argue, households feel richer and spend more, and lenders safeguard the value of the assets they are lending against. But the problem doesn’t go away. Far from it. The problem is just postponed, and at the current rate of house price decline, will amount to a £180bn funding gap by 2012 when the BoE’s Special Liquidity Scheme is due to end.
The report is only available to members, but I recommend a read of Stephanie’s take:
The cash crunch in India’s banking sector should not be allowed to disrupt economic activity. That’s the message from the Reserve Bank of India, which has raised its repo and reverse repo rates by 25bp. The repurchase rate is now 6.25 per cent; the reverse repurchase rate at 5.25 per cent.
Robust domestic growth and continued high inflation were given as the main reasons for continued rate normalisation. But governor Duvvuri Subbarao said rate rises were likely to slow, barring any inflation shocks: “Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low.”
Australia’s cash rate has been raised 25bp to 4.75 per cent, increasing demand for the nation’s currency enough to tip the Australian dollar past parity with its American counterpart. The move follows bullish minutes after the last rate-setting meeting, and the statement accompanying the move predicted more tightening ahead.
Australia was one of the first countries to start raising rates after the rapid cuts characteristic of the financial crisis. This is the first rate rise since the Reserve Bank started holding in Spring (see chart, right).
Wage growth is beginning to pick up, and upward pressure is expected on consumer prices – which have been kept artificially low by soft food prices in the past quarter: