A Trio of Central Banks

By FX Empire Analyst - Barry Norman
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A Trio of Central Banks are making major decisions today.

Earlier this week, the RBA cut its key lending rate by 25basis points catching markets off guard. One can never been too sure what a central banker is thinking or going to do. Mr. Bernanke from the US Federal Reserve proves this time again.

Today, The Bank of England is meeting, along with the European Central Bank and also the Bank of Japan, with new leadership.

The Bank of England and the ECB are not expected to change interest rates or policy at today’s meetings. The BoE avoids making a statement if they make no changes. Whereas the highlight of the day is expected to be ECB President Draghi’s press conference.

The ECB left its main refinancing rate unchanged at 0.75% which was in keeping with the expectations of forecasters.  The press conference is where the action took.

The Bank of England did what was universally expected and left its asset purchase target unchanged at £375 billion and its benchmark rate at 0.5%.  The big choice lies in whether or not to expand the asset purchase program again at the November 8th meeting when the current round of purchases has been completed.  For hints on the discussion on this topic that may have occurred we’ll have to wait for the meeting minutes that arrive on October 17th.

The lack of action from both banks follows a relatively active summer, where banks both launched new or increased bond buying programs and cut rates to stimulate economic growth. Also, the Bank of England has seen positive results from its FLS scheme, where it makes cheaper financing available to banks who lend more. Such a program has been hinted as another policy option for the Fed to spur lending in the U.S. and for the ECB to potentially replicate as well.

European Central Bank President Mario Draghi stressed the importance of ensuring the independence of the central bank's monetary policy role should it assume the additional responsibility of supervising banks across the 17 member Eurozone, as proposed by EU lawmakers.

Speaking at the ECB's monthly press conference, held in the Slovenian capital as part of the bank's tradition of holding it meetings away from its Frankfurt headquarters twice a year, Draghi said that there were "very important concerns" about the separation of responsibility with the ECB and that these were being addressed with "internal organization."

In order to ensure a separation between the two roles, the European Commission in September called for the creation of an ECB Supervisory Board under a chairman with a five-year, non-renewable term of office. Under the proposal, now being examined by EU lawmakers, the Supervisory Board will also be composed of a mix of ECB representatives and officials from national supervisors.

Across the Pacific, expectations are for policy to remain unchanged, given that the BoJ expanded the size of its asset purchases by ¥10trn on September 19th.  However, rising political pressure for ‘bold action’ and specifically for BoJ purchases of foreign bonds, has increased the risk of easing. The attendance of a political official at the meeting, the first such occurrence since 2003, underlines the desire for action on the part of lawmakers.




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