Actions by Central Banks

Central Banks of nations conduct monetary policies for their own countries with twin objectives of price level stability and sustainable economic growth. Most central banks use interest rates to stimulate or curtail economic growth under different business cycle environment.

The Reserve Bank of Australia (RBA) lowered its cash rate (overnight money market interest rate) by 0.25 percentage point to 3.5% yesterday. In the month before (May 2012), RBA took the market by surprise by dropping cash rate by 0.50 percentage point from 4.25%. Within first part of 2012, RBA shaved 75 basis points off the cash rate.

The Reserve Bank of Australia is the most authoritative in terms of reading the economic climate for Australia. Its monetary policy is forward looking and set in place to address the potential negative impact of the global economy on Australia. With China, an important export market for Australia, slowing and debt crisis of the Eurozone countries unresolved, RBA sees dark cloud in the horizon. This rate cut is a pre-emptive action to get its economy growing.

The European Central Bank (ECB) at yesterday’s meeting decided to keep its interest rate on main refinancing operations at 1.00%, unchanged from previous month. ECB acknowledged that there is increased downside risk to the economic outlook for the euro areas. Inflation is forecast to remain at above 2% for the rest of year. Weighing both inflation and economic slowdown, ECB decided not to adjust key interest rates at this current moment.

Policy statements and actions taken by central banks are things we can read about. They are usually ahead of the curve when compared with commentaries by private sector economists and analysts. The central banks have the resources to gather data in order to set forward monetary policies for their own countries. As investors, it would be beneficial to read about policy statements made by central banks. It can help us decide on investment decisions.

Latest news: The People’s Bank of China, China’s central bank, cuts the benchmark one-year lending and deposit rates by 0.25 percentage point, effective from tomorrow. The one-year benchmark lending rate will fall to 6.31% from 6.56%, and the one-year benchmark deposit rate to 3.25% from 3.50%. (Source: Wall Street Journal, 7 June) This is an indication that the Chinese government is loosening monetary policy to stimulate economic growth in the country.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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