New faces, but no new signals

(27.01.2011) Yesterday’s two monetary policy meetings revealed very little new information and confirmed what many had expected in advance – new faces will have little impact on the monetary policy. However, Minutes from BoE’s meeting in January showed that they had considering hiking interest rates. This seems premature, especially after the disappointing GDP figures Tuesday.

By Maren Romstad, Analyst at DNB Markets

dealingroom DNB markets ccIt was not expected any new signals from the American central bank yesterday, an assessment in line with the actual outcome. Interest rates were kept unchanged and the Committee gave no new information concerning the second round of quantitative easing. The purchases of US Treasuries will continue as planned, both in size and pace. In light of recent development Fed is more optimistic on behalf of the US economy.

A fact that perhaps contributed to Dow Jones rising above 12.000 for the first time since June 2008. Fed emphasized that underlying inflation remains low, but clearly sees through the effect from rising commodity prices. Fed’s biggest concern is still the labour market, where an unemployment rate of nearly 10 per cent is expected to dampen consumption growth and keep wage- and price growth subdued. But these are all matters well known.

New at this meeting were four new members entering the Committee in the annual rotation. This resulted in the first unanimous vote in 12 months. Longer treasury yields edged somewhat higher during the US session, which probably can be linked to the monetary policy meeting, but also the new budget estimates from CBO (Congressional Budget Office).

Rates fell after Obama’s speech Tuesday, where he called for more joint forces to deal with the large deficits. Deficits that according to CBO continue to grow. The budget deficit is estimated at 9.8 per cent this year, up 0.9 percentage points since the August estimates. Earlier the budget office has projected a gradual debt reduction from 2010, but with the new tax rebate the situation is a little different.

In Norway the monetary policy meeting gave no new information, despite the first new governor in twelve years. At his first meeting, Olsen, stuck to the planned outlined by Gjedrem (former governor) and Norges Bank in the monetary policy report from October. The sight deposit rate was kept unchanged at 2 per cent and the overall assessment was more or less in line with expectations. Global growth is continuing to slowly recover, which also has resulted in higher interest rates with major trading partners.

At home growth is gradually approaching normal levels, while household demand appears to have increased more than expected. On the other hand, NOK has been stronger than projected, which could lead to lower inflation. And as pointed out by the central bank, underlying inflation is already low. In addition, there are still considerable uncertainties regarding government finances in several European countries.

The central bank also repeated their concern: The risk of future imbalances suggests that interest rates should not be kept low for too long. If the strong development in consumption and house prices continues there is a risk that Norges Bank could signal an earlier interest hike at the March meeting. We still expect hikes in June and October (in line with the current rate path), in both cases with 0.25 percentage points. In light of market reactions, it could seem that some had expected a more hawkish tone. Interest rates decreased somewhat and NOK weakened marginally. 

As pointed out, yesterday’s interest rate meetings gave little new information, and the minutes from Bank of England stole much attention. Minutes gave indications that the persistent high inflation has tilted the committee towards the first interest rate hike in a long time. Two voted to raise rates at the January meeting. However, one must remember that Tuesday's very disappointing GDP figures for the fourth quarter were not available at the monetary policy meeting, which is likely to lead to a more cautious approach than minutes suggests. The pound strengthened on a broad basis.