A Forex View From Afar

Hunter Gatherers; The Global Central Bank Dilema

Back to www.thelfb.com

This week saw the release of the Bank of England April’s 10 and 11 minutes, the interest rate decision from Bank of Canada, and as has become the norm we saw ECB members speaking about inflation worries.

The Bank of Englandminutes showed that the UK must prepare for hard times to come, with some further slowdowns both in housing and in consumer spending. These slowdowns are mainly due to tighter credit conditions and leverage reductions from financial institutions. In the same note, the Bank of England MPC members expect a lower UK Inflation read during 2008. The overall tone was somehow pessimistic, with Members deciding to act preemptively; if macroeconomic conditions deteriorate further more rate-cuts will be needed.

At the same time the Bank of Canada cut their interest rate by 50 basis points, making it the second consecutive cut of 50 points since the new Governor, Mark Carney, took control. The Big difference between the Bank of England and the Bank of Canada is that the BOC expects the CPI Inflationary pressure to increase further this year, up from the current 1.5% to around 2%. It is a mixed signal that a full 100 basis point cut comes at the same time as a warning that inflation is about to increase by 30% on its current level; low Interest rates and high Inflation = disaster for the value of the base currency. Traders can take from that, it would seem, that the BOC will be increasing rates at the first sign of growth, and at the first signs that Inflation has nudged above 1.5%.

The recent ECB comments, may suggest the same thing as the Bank of Canada; Inflationary pressures are growing; that is not such a big surprise with commodity prices in a strong bull run, and with oil standing at $120 a barrel.

Furthermore, the Bank of Canada said in their interest rate statement that the US recovery is not expected until somewhere around 2009; and that would put paid to the optimistic Bernanke view initially put forward that the US will show GDP growth going into Q4 this year. This is what the BOC had to say about that;

* "The Bank is now projecting a deeper and more protracted slowdown in the U.S. economy"
* "The Bank projects that the Canadian economy will grow by 1.4 per cent this year, 2.4 per cent in 2009, and 3.3 per cent in 2010."
* "However, a gradual recovery in the U.S. economy, a return to more normal credit conditions, and accommodative monetary policy should generate above-potential growth and bring the economy back into balance around mid-2010."

We now have two Central Banks acting preemptively by cutting rates; the Fed and the BoC.
We have one CB that is tackling inflation head-on; the ECB (at least this is what they are saying).
We have two CB’s that see inflation pressures in the near-term as a problem; the BoC and ECB.
We have one CB that can’t decide on Inflation over Growth; The Fed.
We have one CB who sees Growth ahead of Inflation, but is very undecided, and is cutting; the BoE.

The big conclusion is that Central Banks are divided into 2 groups; the Hunters, and the Gatherers.

The Hunters are all chasing the same Inflation Dragon, but have regional differences as to how to actually contain it.



The Gather is busy collating the information and the DNA as to the make-up of the beast, and are debating as to how to be politically correct in profiling the Dragon. Once profiled the case will be sent to the Treasury for analysis, the reports will be digested, a trip to Capital Hill will be undertaken, rhetoric will flow, Ummm’s and Ahhhh’s will abound, and finger pointing will happen. At that stage, possibly sometime later in the year Interest Rates will be increased in an effort to contain the animal, and the Dragon will finally be put on a leash. The Rape and Pillage reaped on the US consumer will have tired the beast, and it will then be easy to control. The taxpayer then goes on to pay for the cost of incarcerating the despicable Inflationary problem. Phew! That was easy for the Fed. See, this Central Banking job is not as hard as it looks.

Those that wait to properly profile the problem may be missing the point that Inflation is stripping away the value of the Dollar, and in some cases the Pound, and in doing so is also gradually stripping away the Global confidence placed in the USD. The FOMC Members may need to take a long hard look at this problem, because if they put a leash on it right now by not cutting rates, the US consumer, although in a world of hurt right now possibly, may not have to go through the ravages of sustained devaluing of the Dollar in their pocket. Swallow the bitter pill and get it done. At that moment the USD would bounce, the equity markets would likely rally, the inter-bank would know that they have had their fill of discounted cash, and the Credit Pipes will start to thaw. Leave the rate cutting in place and the misery of doubt and uncertainty continues.

Tough call, but we now need a dose of Tough Love.

It will be a long time until we see this much of a defined split in the way that Central Banks approach the same problems, and that is a very good thing; hopefully after the Credit Crisis had abated we can get back to trading in a Global market that is a little more in sync. That way we can look forward to trends being formed, Inflation being tamed, and extremes in Volatility, that allow the Quantum Trading black boxes to form the market patterns, subsiding just a little, well at least for a year or two.

1 comments | Posted in » Bank of Canada, ECB, economic preview, Fed