Wednesday, November 14, 2012

Why Aren't Central Banks Cutting Rates?

Last week saw a flurry of central bank action in Australia, the United Kingdom, the EU, Malaysia and South Korea.  Yet,  none of these banks lowered their respective rates.  True, some of these banks (the UK for example) have no room to lower rates.  And others (the EU) are counting on a broader set of programs to help the economy.  But considering the overall economic environment, this overall lack of action seems a bit perplexing.  Let's delve deeper into the respective policy statements from each bank (such that some are) to get an idea for what these institutions are thinking.

South Korea:

The Reserve Bank of South Korea saw a global economy that was weak, stating "The Committee expects the pace of global economic recovery to be very modest going forward and judges the downside risks to growth to be large, owing chiefly to the euro area fiscal crisis and to the fiscal consolidation issue in the US."  Domestically, the environment was just good enough.  Growth was fair, employment was rising a bit and inflation was tame.  However, "the Committee
anticipates that the negative output gap in the domestic economy will persist for a considerable time, due mostly to the prolongation of the euro area fiscal crisis and to the delay in recovery of the global economy." 

Overall, the bank kept rates at 2.75%.


Internationally, the RBA saw a slightly brighter picture.  While the EU is clearly in a recession, the growth in the US and China is fair, albeit fragile.  While the domestic resource economy is strong, it's expected to peak next year -- and at a lower rate than anticipated.  Other areas of domestic demand are soft and the labor market is softening a bit.  Inflation is right at expected levels.

The bank kept rates steady at 3.25%.


While international growth is weak, regional economies are expected to continue growth thanks to domestic demand.  The Malaysian economy will be supported by strong infrastructure spending and domestic demand.  Inflation is contained for now because of weakening global demand.

The bank kept rates at 3%.


"UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters.  The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed.  Business indicators point to a continuation of that weakness in the near term, both at home and abroad.  In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here.  The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent."


EU growth remains weak.  However, the statement highlighted short-term inflationary spikes largely caused by oil prices.  "On the basis of current futures prices for oil, inflation rates could remain at elevated levels, before declining to below 2% again in the course of next year."  Additionally, Draghi began the press conference by talking about inflation, indicating this may be a reason for not lowering rates further.  According to the Financial Times' Analysis, Draghi is attempting to use his inaction as a way to force governments to take action.  

Rates are currently at .75% and were not lowered.

So -- why no movement by any of these banks?

Two -- the UK and the UE -- have little downside room to maneuver in.   Rate cuts by these banks would largely be symbolic.  Additionally, both banks are hoping that non-interest rate measures would replace their inability to lower rates.  The other banks appear to be thinking that things are just good enough for now, thereby allowing them to keep their powder dry in the event of further weakness.