Four of the world’s biggest central banks announced or will announce their decisions on their benchmark interest rates this week. The board of the Reserve Bank of Australia (RBA) started the round of meetings on Tuesday March 6th 2018. The Bank of Canada (BoC) followed with its monthly meeting on Wednesday 7th March 2018. The governing councils of the European Central Bank (ECB) and the Bank of Japan (BoJ) will meet on Thursday March 8th 2018 and Friday March 9th 2018 respectively, concluding the round of meetings.
Market analysts suggest that central banks around the world are preparing to raise borrowing costs. According to a Bloomberg report, published on February 12th 2018, the approval of US President Donald Trump’s tax reform, which includes tax cuts and spending increases, by the Congress could force the US Federal Reserve (Fed) to pick up its benchmark interest rate. The reason is that the new tax bill, which favours businesses, could create additional inflationary pressure in a period that the US inflation is around the Fed’s 2% target and wages are growing. Economists suggest that the Fed will respond to the challenge by raising borrowing costs multiple times during 2018. However, it’s not only the Fed’s policies that play a role, but also each country’s financial conditions.
Reserve Bank of Australia (RBA)
On Tuesday March 6th 2018, the RBA’s board decided to keep the bank’s benchmark interest rate unchanged at 1.5%. March 2018 was the 17th consecutive month that the central bank of Australia kept the rate on hold. The RBA’s Governor, Philip Lowe, said in his statement that “the low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
Bank of Canada (BoC)
The governing council of the BoC met on Wednesday March 7th 2018 to decide on interest rate policy. The board decided in the meeting to keep interest rates on hold at 1.25%. The central bank of Canada had picked up its benchmark interest rate by 0.25% in a meeting that took place in January 2018. The BoC’s January 2018 statement said that inflation was close to target, adding that “the Canadian economy is operating roughly at capacity.” It should be noted that the BoC has raised interest rates three times since July 2017.
European Central Bank (ECB)
The ECB’s board will meet in Frankfurt on Thursday March 8th 2018 for its monthly meeting. Economists forecast that the ECB won’t raise its benchmark interest rate from the current 0%. Mario Draghi, the ECB’s President, has said repeatedly in the past that the board should be patient and persistent in following the current monetary easing policy. The ECB is currently buying €30bn worth of assets each month, mostly government bonds. The program is scheduled to continue at least until September 2018.
Bank of Japan (BoJ)
The BoJ’s board will meet on Friday 9th March 2018. Analysts suggest that the BoJ’s policymakers will keep the benchmark interest rate on hold at -0.1% and the target for the 10-year government bond yield at 0%. The Japanese economy is growing, but inflation stands at 1.4%, far lower than the 2% target that the central bank has set. On Tuesday March 6th 2018, the Governor of the BoJ, Haruhiko Kuroda, testified in the Japanese Parliament and said that it is too early to debate on how to exit from the monetary stimulus program. Governor Kuroda also said that the exit would be gradual and that the BoJ will ensure bond yields won’t spike, disrupting markets.
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