Central banks all over the world have been very cautious in withdrawing fiscal stimulus measures. And although most of them have already decided to unwind non-conventional monetary policy measures, only a few moved to interest rates increases. More importantly, the division over timing of an exit strategy” has been growing in last month's due to different GDP growth expectations. For example, the Reserve Bank of Australia has already increased the benchmark interest rate three times while US Federal Reserve, the Bank of Canada, the Reserve Bank of New Zealand and the People's Bank of China may start rising the cost of borrowing as early as in the second part of 2010. Yet, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank are likely to wait much longer.â€¨â€¨
US Federal Reserveâ€¨â€¨
Unlike most central banks, the US Federal Reserve focus has been more on supporting growth than keeping inflation expectations stable. Indeed, in the fourth quarter of 2009, the United States economy expanded at an annualized rate of 5.9% giving the impression that the recovery in world’s largest economy has been stronger than expected. Yet, looking at more recent data the market is getting a mixed message about the health of the economy. For example, sales of newly built homes fell for a fourth straight month to a record low in February while orders for durable goods rose for a third month. That said, on one hand, the central bank is preparing an exit from quantitative easing as easy money may create another bubble. On the other, the Fed is very reluctant to rise cost of borrowing as it may weaken a still struggling housing market.
â€¨â€¨European Central Bank
Recession in the Euro Area started a quarter later than in the United States. Thus it took more time for the European Central Bank to initiate easing monetary policy measures. And although, at its March meeting the ECB took more steps to withdrawal some of unconventional policy measures, sluggish recovery connected with tensions over fiscal sustainability of Greece and other European countries will hamper for some time any interest rates hikes.
â€¨â€¨Bank of Japan
In the fourth quarter of 2009 Japan’s growth picked up finally, rising 3.8% from the previous quarter. Yet, the sustainable recovery is far from being achieved since most of the growth came from various stimulus measures and can be easily erased. Adding to that still weak domestic demand and deflationary pressure and Bank of Japan not only will keep interest rates at record lows but also try to flood the market with cheap money. Indeed, at its last meeting in the third week of March, Policy Board eased further monetary policy by doubling a program of three-month, 0.1 per cent loans to banks from Y10,000bn ($110.6bn) to Y20,000bn.
Bank of England
In the United Kingdom, after a sluggish recovery in the last quarter of 2009, some indicators are pointing to much stronger growth in the first part of 2010. Yet, the Bank of England Monetary Policy Committee has been very cautious in taking any tightening steps. The MPC is afraid that the upturn may be short lived due to government actions to cut budget deficit (increase in Value Added Tax), sluggish growth in the Euro Zone (which is main exports partner) and rise in unemployment. Looking further, some economists are even looking for an extra bond purchases as near-term inflationary expectations prompted by VAT increase falter in February.