No sign of policy tightening yet

Federal Reserve keeps the key policy rate unchanged and will complete QE2 as planned. A tightening o

(28.04.2011) Federal Reserve keeps the key policy rate unchanged and will complete QE2 as planned. A tightening of monetary policy still seems some way off.

By Camilla Viland, Analyst at DNB Markets

Federal Reserve yesterday kept the Fed funds target rate unchanged at 0.25 per cent, as expected. In it's first of a kind news conference yesterday Ben Bernanke also signalled that the Fed would complete its current QE2 programme as planned. He also suggested that the first tightening of Fed policy tightening would be a decision to stop re-investing early repayments from the Fed security the Fed's security portfolio, but that such a decision remained some way off. Bernanke also said that interest rates will be kept at current levels for an extended period, which means that they will not be raised for a couple of meetings.

The US central bank also revealed new forecasts for the US economy. Inflation is expected to be above its goal this year, but Bernanke said the rise in prices would be transitory. Fed also forecast slower growth than previously anticipated. In the aftermath of the press conference US stock markets rose and the dollar weakened. Versus the euro the dollar is currently at its weakest level in 16 months.

While rate hikes still seem some way ahead for Fed, it is more uncertain what Bank of England will do. British inflation is far above target, indicating that rates could be raised. On the other hand there are large uncertainties surrounding the economic outlook and the development so far this year has not been impressing. In the first quarter GDP grew by 0.5 per cent. This was however not more than enough to erase losses made in the previous quarter. Thus the economy has more or less stood still over the past six months. And with the consumers retrenching and signs that the industrial recovery is about to peak, the outlook going forward also seems bleak. Thus a near term interest rate hike now seems less likely. Even so the GBP strengthened after the GDP release yesterday. Market participants may have feared an even weaker outcome.

The catastrophe which hit Japan contributed to a plunge in manufacturing output in March. The decline was -15.3 per cent in March, the largest drop ever recorded. However manufacturers expect output to rise in the coming months. This is a view that is shared by Japanese authorities. To help Japanese companies hit by the disaster, the Japanese central bank will offer loans to financial institutions that have business offices in disaster areas that conduct lending. The duration of the loans will be one year and the interest rate 0.1 per cent.

The Japanese central bank also has decided to keep monetary policy on hold. However, the deputy governor did vote to increase outright asset purchases, but did not gain majority for his proposal.

Today preliminary US GDP figures for the first quarter will be released. After a strong end to last year, the development seems to have been poorer so far this year. Consensus expects GDP to have grown by 2.0 per cent q/q yearly rate in Q1, down from 3.1 per cent in Q4 2010. Other important figures from the US today are the weekly labour market figures and pending home sales in March.

From Norway the highlight of today's agenda is Norges Banks Q2 lending survey. In Q1 banks reported that households demand for loan was unexpectedly high. Given high temperature in the housing market, the strong trend may have continued. If so there is a risk that households' credit growth is going to go up. The Norwegian central bank is concerned about such a development and in connection with their latest monetary policy meetings the bank has stated that the risk of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead suggests that the key policy rate should be increased in the near term. Thus a further signs that households' demand for loans is increasing will make it very likely that the central bank will hike the key policy rate at its next meeting, in May.