The Reserve Bank of New Zealand was the first central bank in a developed economy to lift interest rates this year. It’s not finished.
As was widely expected, the central bank raised interest rates for a fourth time this year, pushing its key rate up a quarter of a percentage point to 3.5 per cent.
While raising rates, Graeme Wheeler, the bank’s governor, warned that the New Zealand dollar was overvalued.
With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.
Mr Wheeler said the economy appeared to be adjusting to the tightening monetary policy and that it was “prudent” the country’s central bank asses activity before lifting rates further towards a “more-neutral level”.
The Reserve Bank forecasts New Zealand’s economy will expand by 3.7 per cent this year.
IMF head Christine Lagarde has warned that financial markets maybe a little too upbeat given the persistently high levels of unemployment and debt in European economies.
She also warned that continuing low inflation could undermine growth prospects in the region.
But she did say the European economy was recovering and interest rates should stay low until demand picks up.
Last month, the European Central Bank cut its main interest rate to 0.15%.
It also cut its deposit rate – the rate it pays banks to keep money on deposit – to -0.1%, becoming the first major central bank to introduce negative rates. >> Read More
A mismatch between a strengthening US recovery and the record low level of interest rates risks storing up problems for the world’s largest economy, a Federal Reserve policymaker has warned.
James Bullard, the president of the St Louis Fed, said on Thursday that:
The macroeconomic goals of the Committee are close to being met. However, the policy settings of the Committee are far from normal.
While this mismatch is not causing macroeconomic problems today, it takes a long time to normalise policy and the mismatch may cause problems in the years ahead as the economy continues to expand.
Mr Bullard’s intervention comes as a strengthening US jobs market intensifies speculation over when the Fed will lift interest rates for the first time since the financial crisis.
Janet Yellen, the Fed chairwoman, this week signalled in testimony to Congress that interest rates are likely to stay at record low levels as the economy continues to recover.
Mr Bullard, who doesn’t have a vote on interest rates this year, added: >> Read More
One (voting) policymaker has suggested the Federal Reserve will pull the trigger on the first rise in US interest rates since the financial crisis in the early part of 2015.
Richard Fisher, the president of the Dallas Fed and a voting member on the Fed’s top panel, said on Wednesday that the world’s largest economy is recovering more quickly than the central bank had forecast.
Despite a surprise contraction in the first-quarter, the US labour market has continued to improve with the unemployment rate falling to 6.1 per cent in June.
That has intensified speculation among investors over when Fed officials will raise their key overnight borrowing rate. In a speech in Los Angeles, Mr Fisher said:
That early next year, or potentially sooner depending on the pace of economic improvement, the FOMC may well begin to raise interest rates in gradual increments, finally beginning the process of policy normalization.
Mr Fisher also took issue with the argument that a combination of tighter regulation and new capital requirements on banks will be enough to temper the potentially risk-taking by investors that low interest rates encourage. >> Read More
Janet Yellen, the chairwoman of the US Federal Reserve, is delivering her semi-annual testimony to Congress on Tuesday.
Here are some key extracts from the testimony, which will be followed by a Q&A session with members of the Senate Banking Committee:
On the recovery
Although the economy continues to improve, the recovery is not yet complete. Even with the recent declines, the unemployment rate remains above Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level.
On the US jobs market
Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment. These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation.
On the timing of interest rate increases >> Read More
With EURUSD hardly budging, constantly disappointing economic data (from periphery to the core now), and central bank transmission mechanisms that are entirely clogged and useless for anything but stuffing the pockets of bloated bank balance-sheets with domestic sovereign debt, it is no wonder Germany’s Bundesbank has said ‘enough’. “If we pursued our own monetary policy… it would look different,” explained Bundesbank chief Jens Weidmann. As Reuters reports, Weidmann noted that many savers in Germany were irritated by low interest rates and property prices were overvalued in some big city areas in Germany; implicitly threatening the ECB’s chatter-box that “this phase of low interest rates, this phase of expansive monetary policy, should not last longer than is absolutely necessary.”
As Reuters reports,
The European Central Bank’s interest rates are too low for Germany, Bundesbank chief Jens Weidmann said on Saturday, adding that ECB monetary policy should remain expansive for no longer than absolutely necessary.
Speaking at a Bundesbank open day for the public, Weidmann noted that many savers in Germany were irritated by low interest rates but said these were aimed at supporting investment and consumption.
“It is clear that monetary policy, when seen from a German viewpoint, is too expansive for Germany, too loose,” Weidmann told a crowd at the start of the open day. “If we pursued our own monetary policy, which we don’t, it would look different.”
>> Read More
Federal Reserve officials agreed at their June policy meeting to end the central bank’s bond-buying program by October, closing a chapter on a controversial experiment in central-banking annals with results still the subject of immense debate.
Officials have been winding down their purchases of Treasury bonds and mortgage-backed securities in incremental steps since January and have said they expect to end the program later this year, but until now haven’t been explicit about the end date.
“If the economy progresses about as the [Fed] expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting,” the Fed said in minutes released Wednesday from its June policy meeting.
The bond program aims to hold down long-term interest rates and drive investors into riskier holdings like stocks or corporate debt. That in turn is meant to stimulate borrowing, lending, spending, investing and hiring. >> Read More
They may be anonymous, but the minutes of the meeting of the Federal Reserve’s top brass usually shed light on how officials are thinking about the world’s largest economy.
The minutes of the June 17-18 meeting are released at 2pm New York time. Here’s what to watch for.
Is the Fed’s conversation about the labour market changing?
Officials gathered before the release of June’s stronger jobs number. But the minutes should provide some indication on whether they believe the labour market is getting close to a state that would warrant higher interest rates. Any discussion of wage growth will be of interest, as its muted level since the recession has been cited by chairwoman Janet Yellen as a worry.
Is there a concern about financial markets?
Anxiety over whether low interest rates were encouraging potentially reckless risk-taking by investors was one of the reasons the Fed signalled last summer that it intended to taper its bond-buying.
Fast forward a year, and concerns remain at the Fed’s top table. Ms Yellen addressed the question in a speech last week, downplaying the idea that bubbles were building in financial assets, but also cautioning that monetary policy is not the tool to address them. The minutes should reveal whether the chairwoman’s colleagues are equally sanguine.
About those dots… >> Read More