Last week, the Bank of England and the Reserve Bank of Australia held their first monetary policy meeting for this year. In this article, we will look at the takeaway from the meetings.
BoE put to rest speculation on adoption of negative interest rate.
The third national lockdown imposed on England early last month led to the speculation that the Bank of England (BoE) is likely going to take interest rate to the negative level to cushion the negative impact on the UK economy. However, the speculation has been put to rest by the central bank during its monetary policy meeting last week. In the monetary policy minutes, the BoE stated that it “did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future”. Furthermore, the central bank highlighted that the implementation of negative interest rate will require preparatory work to be carried out six months before its implementation. In an effort to control the situation, BoE Governor Andrew Bailey advised the public not to speculate any future actions that the central bank may take.
On the economic recovery side of things, the BoE expects the UK economy to contract by 4% during the first quarter of 2021. However, the central bank is optimistic that the economy will recover fast this year with UK’s speedy vaccination programme, expecting the economy to return to the pre-pandemic level by the first quarter of 2022. As a result, the BoE revised down its economic growth forecast for 2021 from 7.25% to 5% but revised up its forecast for 2022 from 6.25% to 7.25%. Finally, the central bank kept its interest rate and monetary policy unchanged.
RBA carries out more monetary policy easing.
Unlike the Bank of England, its Australian counterpart took a more aggressive approach towards monetary easing. During the monetary policy meeting last week, the Reserve Bank of Australia (RBA) decided to purchase additional $100 billion of government bonds once the current bond purchase program ends in mid-April. The main reason for the central bank to carry out more easing was due to subdued wage and price pressures. The RBA highlighted that the latest annual inflation rate of 0.9% is still far from the central bank’s targeted level of 2-3% while wages are increasing at the slowest rate ever. The central bank expects both inflation and wages to pick up gradually but will still remain below 2 per cent over the next two years.
Despite the subdued wage and price pressures, the RBA also acknowledged that economic recovery in Australia has exceeded their expectation. The jobs market has been performing well, indicating strong employment growth and continued decline in unemployment rate. Consumer spending has also been strong while an increase in the number of deferred loan repayments have been made. Thus, the central bank is now expecting the country’s economic growth to return to the end-2019 level by mid-2021 as opposed to the previous expectation of end-2021. Lastly, the RBA also expect interest rate to remain at the current level of 0.10% until wages growth is higher than the current level and its inflation target range of 2-3% has been met, which the central bank foresees it to happen only in 2024 at the earliest.
BoE put to rest speculation on adoption of negative interest rate.
The third national lockdown imposed on England early last month led to the speculation that the Bank of England (BoE) is likely going to take interest rate to the negative level to cushion the negative impact on the UK economy. However, the speculation has been put to rest by the central bank during its monetary policy meeting last week. In the monetary policy minutes, the BoE stated that it “did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future”. Furthermore, the central bank highlighted that the implementation of negative interest rate will require preparatory work to be carried out six months before its implementation. In an effort to control the situation, BoE Governor Andrew Bailey advised the public not to speculate any future actions that the central bank may take.
On the economic recovery side of things, the BoE expects the UK economy to contract by 4% during the first quarter of 2021. However, the central bank is optimistic that the economy will recover fast this year with UK’s speedy vaccination programme, expecting the economy to return to the pre-pandemic level by the first quarter of 2022. As a result, the BoE revised down its economic growth forecast for 2021 from 7.25% to 5% but revised up its forecast for 2022 from 6.25% to 7.25%. Finally, the central bank kept its interest rate and monetary policy unchanged.
RBA carries out more monetary policy easing.
Unlike the Bank of England, its Australian counterpart took a more aggressive approach towards monetary easing. During the monetary policy meeting last week, the Reserve Bank of Australia (RBA) decided to purchase additional $100 billion of government bonds once the current bond purchase program ends in mid-April. The main reason for the central bank to carry out more easing was due to subdued wage and price pressures. The RBA highlighted that the latest annual inflation rate of 0.9% is still far from the central bank’s targeted level of 2-3% while wages are increasing at the slowest rate ever. The central bank expects both inflation and wages to pick up gradually but will still remain below 2 per cent over the next two years.
Despite the subdued wage and price pressures, the RBA also acknowledged that economic recovery in Australia has exceeded their expectation. The jobs market has been performing well, indicating strong employment growth and continued decline in unemployment rate. Consumer spending has also been strong while an increase in the number of deferred loan repayments have been made. Thus, the central bank is now expecting the country’s economic growth to return to the end-2019 level by mid-2021 as opposed to the previous expectation of end-2021. Lastly, the RBA also expect interest rate to remain at the current level of 0.10% until wages growth is higher than the current level and its inflation target range of 2-3% has been met, which the central bank foresees it to happen only in 2024 at the earliest.
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