Wednesday, 5 December 2007

BoC cuts rates, others to follow?

While everyone is watching the Fed's interest rate decision next week and the ECB and BoE's tomorrow, it turns out that the BoC provided the first major market-moving central bank decision this week. Bloomberg reports:

The Bank of Canada unexpectedly lowered interest rates by a quarter point after the Canadian dollar's rally slowed inflation and market "volatility" threatened to cool economic growth...

Bank of Canada officials, led by Governor David Dodge, cut the target rate for overnight loans between commercial banks to 4.25 percent. "The Bank now expects inflation over the next several months to be lower than was projected," the bank said today in Ottawa. The statement also cited "global financial- market difficulties" and an "increased risk" to exports.

The BoC is obviously looking into the future. Of the present:

The central bank repeated today the economy is operating beyond full capacity. In recent months it has said the economy is strained by strong domestic demand and high prices for the country's energy and metals.

In its decision today, the RBA chose not to follow in the BoC's footsteps. Bloomberg reports:

Australia's central bank left its key interest rate unchanged, citing "heightened uncertainty about the international outlook" and rising credit costs.

Governor Glenn Stevens and his board left the overnight cash rate target at an 11-year high of 6.75 percent in Sydney today, and for the first time released a statement explaining its decision to leave borrowing costs unchanged. All 27 economists surveyed by Bloomberg News forecast today's decision.

"Sentiment in global credit markets has deteriorated recently" and "prospects for growth in the major economies appear to be weakening," the central bank said. Borrowing costs at an 11-year high would contain consumer demand, the bank said, raising speculation Governor Stevens won't raise rates early next year to stem inflation, as had been predicted by most economists.

Nouriel Roubini suggests though that the ECB and BoE should emulate the BoC. In fact, he suggests:

... that all major central should cut policy rates as soon as possible. It is not time to temporize and wishfully hope that the credit crunch will go away; conditions in interbank markets and credit markets are much worse now than they were in the peak of the crisis in August as measured by various Libor spreads relative to policy rate or to same maturity government bond yields; thus, the minimum that central banks should do now is to cut policy rates.

Paul Kasriel thinks they will. And that could be good for gold.

[C]entral banks in the developed world are cutting their policy interests as their all-items inflation rates go vertical. So, while fiat currencies float along in tandem as their supplies increase in tandem, all of them are likely to sink in value relative to the genuine “reserve currency” -- gold. As this is commentary is being wrapped up (1:55 pm CST), the nearby gold futures contract in terms of U.S. dollars is up in price 1.90%. As developed-world central banks attempt to figuratively and literally “paper-over” the credit market implosion by creating more central bank money, the price of gold in terms of these fiat currencies -- not just the U.S .dollar -- is likely to keep on rising.

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