Reaction to the Bank of England’s News

Considering the stagnation that characterized United Kingdom last year, this year we cannot expect miracles to happen. Thereby, the recovery is expected to be slow, with the inflation staying around the values of 3% (CPI inflation rose at 2.9% in June).

Even if the outlook for the U.K.’s economy becomes increasingly positive from one quarter to another, the wounds left by the under target productivity which in turn caused a decrease in demand and also the inflation above target, determines the economists to be realistic and to give time to the economy in order to recover. Here comes the BoE, saying that is ready to intervene so as to make the economy get up and run again at the fastness registered before 2005. Maintaining its focus on price stability, BoE engaged to keep the highly stimulative monetary policy at the current pace for the next 3 years and to maintain the forward guidance as well, with a stable interest rate at the value of 0.5% until the unemployment rate drops to 7% (currently at 7.8%). Proving caution and responsability, BOE affirmed that is liable to intervene and change any of the above mentioned measures in case the inflation’s value will remain 0.5% above the 2% target for next 2 years and if the actual monetary policy will prove to seriously affect the financial stability or price stability.

Assuming that this context is being maintained, United Kingdom will get back to growth, perspective that boosted the investors’ confidence to buy the British pound today, as it was the top mover. The fact that Governor Mark Carney decided to clearly express the BoE’s plans for the future recovery has inspired even more confidence that this growth will really happen. In fact, is extremely important not to neglect the overall image of the Euro zone economy since it is really significant how it handles the current situation which affects all the member states.

What Did FOMC Decide?

FOMC announced to keep the interest rate at 0.25% and not much information about the QE3. The program is maintained at the previous parameters with no given data for an eventual tapering. On the other side, the inflation becomes an alarming issue as “persistently below its 2% objective could pose risks to economic performance”. In this regard, and taking in consideration the continuation of the monetary stimulus program, economists are expecting the core inflation to rich 2% in the medium term.

Earlier today, good news came for the American economy, as signs of recovery appear to become increasingly more consistent. The ADP report came up better than expected (200k), possibly giving the tone to the NFP that is waited on Friday. Broadly, this result is sustained by the services sector which created 177k jobs, the biggest gain since last November. The labour market demonstrated the fact that the turbulences given by the cuts in government spendings, fiscal issues and tax increases were safely overcome. The advanced GDP release (1.7%), the version that tends to have the most of the impact, showed that the worse of the financial problems are being left behind.

Japan May Face a Small Obstacle

Starting with April this year the QQE program (quantitative and qualitative monetary easing) has been launched. Through this program, the Government is increasing annually the monetary basis by 60-70 trillion yen. The quantitative aspect is determined by the great amount of JGBs bought monthly while the qualitative aspect is represented by increasing average remaining maturity of the Bank’s JGB purchases to about 7 years. Positive effects have been observed in terms of stocks (whose prices rose), a flat long-term interest rates, a more favorable consumer’s sentiment and increased expectations for inflation.

The pace of growth is expected to evolve as: 2.8% for fiscal 2013, 1.3% for fiscal 2014, and 1.5% for fiscal 2015. The only disturbing factors are the two scheduled consumption tax hikes (this scenario is valid if the global economic situation remains stable otherwise, the strongest obstacle remains the anxious global economic evolution). An increase in the sales tax in considered to be mandatory in order to sustain the  ”repair” rhythm of the country’s finances.

In the meantime, Japanese officials are visiting China on the 29th and 30th of July in an attempt to build a mutually beneficial relationship and to solve the territorial disputes.

FED, Took No Decision Today

Ben Bernanke had a very clean speech, emphasizing all the possible scenarios and the correspondent solutions. He didn’t said that the QE3 is going to be ended at a certain point for sure but neither he said that QE3 will continue for an undetermined period. The key factors of this equation are the signals of the American economy, especially the labor market and inflation. Lately, the U.S. enjoyed positive results and the rising star that lead to such positive news is the housing market.

As for the rest of the year, “a highly accommodative monetary policy will remain appropriate for the foreseeable future”. At a certain point, trying to soften the effects of its last speaking, Ben Bernanke gave the impression that the indulgent measures are of need so the QE3 program and the “forward guidance” represent the main 2 tools which need important reasons before being removed (key levels are expected in the labor market <<6.5%>> and inflation <<near the 2% target>>).

In order to properly end his speaking, Ben Bernanke wanted to notify the investors that “the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”

If we are to compare the pro QE3 attitude of Ben Bernanke today and the contra QE3 ideas that Esther George transmitted yesterday ,as a representant of half of the FOMC members, which would be the most probable scenario? We should wait the tomorrow’s report where the chairman of Fed is expected to take a more clear position.

Why Ending QE3?

The Federal Reserve received today encouraging signals from the U.S. economy. The Consumer Price Index indicated a rise (0.5%) in the price of goods, mainly sustained by the higher cost of gasoline, fact confirmed by the Core Consumer Prices Index that was reported in line with expectations at 0.2% (the last index excludes the energy and food’s costs). It is important to see the inflation being kept under control but on the other side, low values of the index of prices are not much help for the economy. The industrial production has taken a balanced value, particularly sustained by more confident homebuilders. Since January 2006 the house building industry started to lose its pulse and now it seems that it may regain its rhythm.

The positive outlook was maintained by the speech of one of the FOMC members today. Even if the growing rate is not as high as expected, it is stable and represents the ground for the monetary policies that are implemented. If the economy is continuing at this pace, the tapering of QE3 is expected to start later this year with an end in the first quarter of 2014. Further improvements are expected especially in the job and housing market. It is important to remember the fact that United States is seriously affect by the global negative sentiment (recently, the IMF revised down its global growth projections) and the fact that economies like China are slowing down.

Should We Believe in Japan’s Recovery?

The press conference of Bank of Japan announced its optimistic view concerning the next 2 years period. In this matter, the latest data about Japan came better, together with the successful implemented quantitative easing, promise to keep Japan safe. Thereby, an increase in exports and public investments along with a moderate increasing in industrial production and accommodative financial conditions have great potential to lead in maximum 2 years to the targeted 2% inflation. The monetary stimulus activity has been shown to have great results so far and is being maintained for the moment with the possibility of adjustments. Moreover, the International Monetary Fund rised its forecast for Japan from 1.6% to 2% growth this year, becoming the only bright economy from the Group of Seven industrialized economies.

On the other hand, the slowing economy of China is posing serious problems, as well as the weak Europe, the fragile United States and the weakening of the commodity-exporting economies.