CURRENCY

UNCERTAIN ECONOMY FORCES CENTRAL BANKS TO KEEP RATES STEADY

The global recovery has been on an uneven path with some economies rebounding even as the coronavirus – and its variants – continue to rear its ugly head.

Central banks across the world have responded with monetary policy easing and other measures to support their respective economies and the private sector.

Amid this continuing trend, the US dollar has staged a smart recovery after falling to a low of 89.21 points in June against a basket of currencies.

The USD is trading at 92.52 in early August amid news that the US Federal Reserve is poised to taper and, at some point, raise interest rates. There were also concerns about high inflation rates in the US, which stood at 5.4% in July and would require the monetary policy to be reined in.

In a much anticipated Federal Open Market Committee (FOMC) meeting, Federal Reserve governor Jerome Powell emphasised the improvement in the economy, with expectations for strong gains in employment. The Fed decided to maintain its interest rate within the target range for the federal funds rate at 0 to .25%. It also expects to maintain this target range until labour market conditions have reached levels consistent with the committee's assessments of maximum employment, as well as inflation rising to 2% and is on track to moderately exceed 2% for some time.

On inflation, Powell said he was still comfortable that bottlenecks, while larger than expected and potentially leaving near-term risks to the upside, will fade out alongside the one-off boost from energy and low base year prices. He also drew comfort from tamed long-term inflation expectations.

“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen,” the Federal Reserve said in a statement. “The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.”

The FOMC also noted that it wanted to achieve maximum employment and inflation at the rate of 2% over the longer run. With inflation having run persistently below this longer-run goal, the committee will aim to achieve inflation moderately above 2% percent for some time. By seeking inflation that averages 2% over time, the committee hopes longer term inflation expectations will remain well anchored at 2%.

CENTRAL BANKS KEEP RATES STEADY

Meanwhile, the European Central Bank (ECB) also pledged to support its 2% inflation target in line with its monetary policy strategy.

In its July meeting, the Governing Council said it “expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. This may also imply a transitory period in which inflation is moderately above target.”

The ECB said the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50%, respectively. The euro is down 3.4% against the US dollar year to date at 1.18.

The Bank of Japan (BOJ), as widely expected, also decided to keep its policy measures unchanged at its monetary policy meeting in July. And it has kept its cautious recovery outlook, but downgraded its FY2021 growth forecast slightly although the easing growth trend remains intact until FY2023.

The most notable change was the inflation forecast upgrade for FY2021 (due to higher energy prices) but the persistent view of well below 2% inflation forecasts in FY2022/2023 remained intact. The Japanese yen has surged against the US dollar by 6% to 109.59 year to date.

The People’s Bank of China (PBoC), meanwhile, is faced with a slowdown after a strong recovery. The country’s factory activity fell sharply in July as demand declined for the first time in over a year in part on high product prices, according to The Caixin/Markit Manufacturing Purchasing Managers’ Index.

Analysts are calling the PBoC to cut interest rates to boost the economy. The yuan has been flat for the year against the US dollar, trading at 6.47 – 0.85% lower against the American currency year to date.