Wednesday, 6 October 2010

RBA holds rates as BoJ goes back to ZIRP

The Reserve Bank of Australia unexpectedly left interest rates unchanged on Tuesday. AFP/CNA reports:

Australia left interest rates on hold at 4.50 per cent Tuesday for the fifth consecutive month, citing moderating inflation and uncertain global conditions.

Reserve Bank of Australia governor Glenn Stevens said rates were close to their average over the past decade, but warned they would be likely to push higher "at some point".

The Bank of Japan went one better. From Reuters:

The Bank of Japan on Tuesday pledged to pump more funds into the struggling economy and keep rates virtually at zero, surprising markets and stealing a march on the Federal Reserve in providing a fresh dose of economic stimulus...

It cut its overnight rate target to a range between zero and 0.1 percent, from 0.1 percent, reinstating the so-called zero-interest policy that the BOJ ended only in July 2006, and it pledged to buy 5 trillion yen ($60 billion) worth of assets.

It said it would keep its benchmark rate effectively at zero until price stability is in sight, adopting a U.S. Federal Reserve-style commitment to ultra-loose policy.

The economic data on Tuesday had been relatively positive, with the services sectors in the US, euro area and the UK all doing better in September than expected.

In the US, the ISM non-manufacturing index rose to 53.2 in September from 51.5 in August.

In the euro area, the Markit services index fell to 54.1 in September -- the preliminary reading had been 53.6 -- from 55.9 in August.

In the UK, the Markit/CIPS services PMI index increased to 52.8 in September from 51.3 in August.

All of these added up to a positive day for markets. Reuters reports:

Stocks rallied to nearly a five-month high on Tuesday on growing conviction that central banks will do even more to bolster struggling economies worldwide...

Crude oil hit a five-month peak near $83 a barrel and gold hit another record high at $1,341.20 an ounce...

The Dow Jones industrial average gained 193.45 points, or 1.80 percent, to 10,944.72...

And there could be more goodies to come for markets as the world's most influential central bank prepares to join the latest QE fray. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said the central bank’s first round of large-scale asset purchases improved the economy and that further buying is likely to help more.

“I do think that the additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions,” Bernanke said in response to questions in Providence, Rhode Island, at a forum with college students. He said the first wave that ended in March was an “effective program”...

Separately, Brian Sack, the New York Fed official in charge of carrying out FOMC decisions, said a further expansion of the central bank’s $2.3 trillion balance sheet would help stimulate a recovery that is forecast to be “relatively tepid.” Smaller steps of purchases may be warranted in contrast to the last round, Sack said in Newport Beach, California...

New York Fed President William Dudley said last week that the outlook for job growth and inflation is “unacceptable” and that the Fed will probably need to take action.

Policy-makers in smaller economies are already taking steps to stem the flood of foreign money. From Bloomberg on Tuesday:

Governments from South Korea to Brazil are stepping up attempts to control their currencies as investors pour a record amount of money into emerging markets.

Regulators in Seoul will start an audit of lenders handling foreign-currency derivatives on Oct. 19 to curb volatility caused by capital flows, the finance ministry said today. Brazil doubled a tax it charges foreigners on investments in fixed- income securities to 4 percent yesterday...

The Bank of Thailand is still studying measures to help manage the appreciation of the baht, which reached a 13-year high of 30.08 per dollar yesterday, Director Wongwatoo Potirat told reporters in Bangkok today. Policy makers in Indonesia, Malaysia and the Philippines have also in the past two months indicated they will intervene to curb volatility.

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