Central Bank News and Interest Rates

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USD/CAD: BoC Inspired Rally Showing Signs Of Exhaustion

The Loonie fell sharply this week after BoC Governor remarked at a press conference on Wednesday that a rate cut has not been taken...
Janet Yellen

Yellen Says U.S. Inflation “Much Closer” to Fed’s Target; Unwise to Let Economy Run...

The U.S. economy is approaching the Federal Reserve's dual mandate of full employment and price stability, making it necessary to continue reining in monetary...
Canada

USD/CAD Extends Higher In BoC Inspired Rally

The Loonie dropped sharply following remarks from BoC Governor's Poloz that a rate cut could still be considered on Wednesday in the press conference...
USA

Philadelphia Fed Manufacturing Index Strengthens To 24-Month High At 23.6

The Philadelphia Fed manufacturing index rose to 23.6 for January from a revised reading of 19.7 for December, which was originally reported at 21.5....
Euro

ECB Interest Rate Decision: European Central Bank Leaves Interest Rates Unchanged, Refi Rate Remains...

As expected, the ECB left all benchmark interest rates on hold following the latest Council meeting with the main refi rate remaining at 0.0%...
Euro

EUR/USD Recovering from Wednesday’s Slide Ahead of ECB Decision

EUR/USD traded with a downside bias throughout Wednesday's session and the pullback accelerated in reaction to comments from Federal Reserve Chair Janet Yellen, who...
eurozone

ECB Preview: Draghi Will Want To Stop Tapering Speculation

ECB President Draghi’s press conference will be the main focus with no change in policy likely. Draghi will want to keep speculation over any...
Canada

BoC Governor Poloz: Rate Cut Could Be Considered If Downside Risks Materialise

In his press conference, Governor Poloz stated that the Bank of Canada was concerned surrounding the risk of changes to trade policies under the...
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Bank of Canada Interest Rate Decision: BoC Maintains Interest Rates At 0.50%, Neutral Stance...

Following its latest policy meeting, the Bank of Canada left its target rate for the overnight rate unchanged at 0.50%, which was in line...

Interest Rates

Central BankInterest RateLast ChangeNext Meeting
Federal Reserve0.75 %Dec 14, 2016Feb 1, 18:00 GMT
European Central Bank0 %Mar 10, 2016Mar 9, 11:45 GMT
Bank of Japan-0.1 %Jan 29, 2016Jan 31, 03:00 GMT
Bank of England0.25 %Aug 4, 2016Feb 2, 11:00 GMT
Bank of Canada0.5 %Jul 15, 2015Mar 1, 14:00 GMT
Reserve Bank of Australia1.5 %Aug 2, 2016Feb 7, 03:30 GMT
Reserve Bank of New Zealand1.75 %Nov 10, 2016Feb 9, 21:00 GMT
Swiss National Bank-0.75 %Jan 15, 2015Mar 16, 07:30 GMT
us federal reserve
european central bank
bank of japan
bank of england
bank of canada
reserve bank of australia
reserve bank of new zealand
swiss national bank

What are Central Banks?

Central banks are responsible for the monetary system of their country. Through monetary policy, changes are made in lending, interest rates, reserve requirements and open market operations. Central banks have a monopoly over the money supply of their country and are able to print the national currency.

By controlling the money supply of its country, the central bank has a great deal of influence on the value of its currency. Monetary policy statements are provided by central banks at regular intervals to offer transparency in their actions, and market participants follow these statements to assist in the speculation of a country’s currency or equity market value.

Central Banks’ Goals and Objectives

Central banks have target mandates that usually relate to employment, price stability, and economic growth. Most central banks have similar targets for price stability, for example, a 2% inflation target is common among most banks. The method of economics used to achieve their targets can differ from one central bank to another.

The Federal Reserve, as an example, is focused on 2% inflation and maximum employment. Fed Chair Janet Yellen is a Keynesian economist who believes in the modern version of the Phillips curve. The model points out an inverse relationship between unemployment and inflation. The idea being that if an economy succeeds in reducing their unemployment rate, inflation levels should increase. Interest rates are then used to control inflation, to prevent the figure from going over the 2% objective.

The Federal Reserve cut their interest rates aggressively following the financial crisis. As the economy has improved, it would be appropriate to raise interest rates once again. But as the Fed’s target mandate is price stability, and maximum employment, they will not take any action that would contradict their mandate. While employment levels have improved, inflation has not reached the 2% level.

Central Banks and Interest Rates

Interest rates impact inflation levels through money supply. When a country raises their interest rate, the cost to borrow increases, resulting in a smaller money supply. When the availability of money decreases, the prices of goods and services either remain stagnant or decrease, hence downside pressure on inflation. For this reason, a central bank would have difficulty raising interest rates during times of low inflation, and inversely cutting interest rates during times of high inflation.

In the Phillips curve model, the inverse relationship pointed out between inflation and employment has resulted in the Fed focusing on employment, with the aim of increasing inflation, so that interest rates can be returned towards prior level.

Each central bank has its own challenges and focus. The Reserve Bank of India is on the opposite end of the spectrum. They have faced an extended period of high inflation, and therefore the interest rate is high, and the currency value is low. While the focus of the RBI is similar in that it pays importance to inflation and employment, their goals differ from the United States.

Central banks aim to deliver transparency in their actions. Their websites will often state their target mandate, as well as include minutes from prior monetary policy meeting minutes, which allow the public to know what the bank is doing.

The major central banks include:

Quantitative Easing (QE) and Open Market Operations

Following the financial crisis, several banks lowered their interest rates to aid the economy. Due to the severity of the crisis, further was action was needed, and Quantitative Easing (QE) measures were implemented in several economies. QE is an unconventional monetary policy that is often referred to as open market operations.

Open market operations allow the central bank a method of directly injecting money into the economy. It can be used as an alternative, or used together with interest rates to increase the money supply. Central banks will purchase government securities or other securities, in doing so the bank turns over its money into the economy while decreasing the supply of the security. These measures are used when there is a need for urgency in increasing the money supply. Timing plays a big role during a crisis, and adjusting interest rates can take time to filter through prior to increases in money supply being realized.

Conclusion

Central banks play a crucial role in the health of a country’s economy, and in the financial markets. The monetary policy action of a central bank carries a great deal of influence on that country’s currency and equity markets. If a central bank is concerned with a specific data set, then market participants will focus on that data and additional volatility is seen in the markets during the release of that data. The website of a central bank provides information on the health of the country’s economy and is a good indicator for market participants in speculating future value of the country’s currency and equity market.

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