Comment: Busy week for policymakers

COMMENT BY CENTRALBANKNEWS

Bank Indonesia defied political pressure yesterday and left rates at 12.75% for a third consecutive month. The central bank did, however, suggest that the next move in interest rates would be downwards. Rates were hiked by 1.25% in the second half of 2005 as the inflation outlook deteriorated following the removal of government fuel subsidies and a depreciation of the rupiah. The ministry of finance has indicated that it wants to see policy rates back to single figures by the end of the year.

The Bank of Canada raised rates again yesterday, taking them to 3.75% - the highest level since September 2001. The move was widely expected, as was the central bank's message that "some modest further increases may be required". However, as the end of the tightening cycle nears, the tone of the policy statement was more dovish than the previous one which did not include the phrase "may be".

The Reserve Bank of Australia's board convened yesterday, with the outcome of the meeting due this morning. Analysts expect rates to remain unchanged at 5.5% where they have been since March 2005. Inflationary pressures have eased of late and both measured and expected inflation remains within the 2% to 3% target range. Surveys suggest that rates could remain on hold for the rest of 2006.

This week's most intriguing monetary policy meeting will be that of the Bank of Japan (BoJ), where unexpectedly strong inflation data for January has fuelled speculation that the central bank will abandon its "quantitative easing" policy on Thursday, rather than in April or May. The governor of the BoJ, Toshihiko Fukui, has said rates are likely to remain at zero for some time after the central bank stops flooding the banking sector of excess liquidity. Markets expect a rate hike in the second half of the year - possibly in August.

Like its trans-Tasman neighbour, the Reserve Bank of New Zealand (RBNZ) is also expected to keep its rates unchanged when its monetary policy meeting ends on Thursday. The central bank, which targets inflation of between 1% and 3%, has raised rates nine times since January 2004, taking them to 7.25% - the highest amongst countries with an AAA credit rating. Although RBNZ governor, Alan Bollard, has recently said inflation expectations are "uncomfortably high", markets expect a 50 to 75 basis easing by the end of 2006.

Finally, the Bank of England remains the only leading central banks looking to cut rates. With the Fed, the Bank of Canada and ECB dropping strong hints that further hikes are likely and the BoJ only starting to think about tightening, the Bank of England is certainly bucking the trend. However, hopes of a cut on Thursday have all but evaporated following a string of recent data providing evidence on continued economic strength. Most economists still expect the next move in rates to be downwards. Although January's inflation figure of 1.9% was below the BoE's target of 2%, the February inflation report shows that expectations have stabilised around the target over the policy horizon of 12 months and longer. If these expectations remain anchored, the BoE could cut rates in the summer to support a potentially slowing economy.