| In end-08, central banks worldwide reduce policy rates to stimulate economic growth, in hopes of combating the worst global recession since World War II. Apart from traditional easing measures, some central banks also implemented 'non-standard' policies such as quantitative easing. Now that a year has passed, global economic outlook has shown signs of improvement. Although the road to recovery is likely bumpy, policymakers need to slowly unwind the ultra-expansionary policies they adopted over the year. | Consensus | Next meeting | Current | Jan-09 | 1Q10 | 2Q10 | 3Q10 | First Rate Hike | | FED | 27-Jan | 0-0.25 | 0-0.25 | 0-0.25 | 0-0.25 | 0-0.25 | 4Q10 | | ECB | 14-Jan | 1 | 1 | 1 | 1 | 1.25 | 3Q10 | | BOE | 7-Jan | 0.5 | 0.5 | 0.5 | 0.5 | 0.75 | 3Q10 | | SNB | 11-Mar | 0.25 | 0.25 | 0.25 | 0.25 | 0.25/0.5 | uncertain | | BOJ | 26-Jan | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | uncertain | | RBA | 2-Feb | 3.75 | 3.75 | 4 | 4.375 | 4.5 | October 09 | | RBNZ | 28-Jan | 2.5 | 2.5 | 2.5/2.75 | 3 | 3 | 2Q10 | | BOC | 19-Jan | 0.25 | 0.25 | 0.25 | 0.25 | 0.75 | 3Q10 | FED: The Fed brought the policy rate to record low level of 0-0.25% in December 2008. At the same time, policymakers decided to adopt QE through large scale asset purchases, including Treasury ($300B), MBS ($1.25T) and agency debts ($175B), as well as some other facilities such as Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF). In order to promote a smooth transition in markets, the Fed is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the 1Q10. According to the accompanying statement of December's FOMC meeting, most of the Fed's special liquidity facilities (including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility) will expire on February 1, 2010, consistent with the Fed's announcement of June 25, 2009. The amounts provided under the TAF will continue to be scaled back in early 2010. The anticipated expiration dates for the TALF remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Fed's rate decision depends heavily on inflation and job market. Although CPI has emerged from deflationary level since November 2009, it stays below the central bank's long-term target. As stated several times after FOMC meetings, the Committee expected that inflation will remain 'subdued for some time' as 'substantial resource slack likely to continue to dampen cost pressures' and 'longer-term inflation expectations stays stable'. Concerning employment condition, the jobless rate surged to 10.2%, a level not seen since 1983, in November, 2009. Although the rate slid to 10% in December with surprising payroll addition, it takes time to see if the drop in rate can sustain. Moreover, the Fed normally raise rate only after the jobless rate has fallen for several months. Therefore, it's unlikely to a rate hike until the second half of 2010. Consensus forecast the Fed will adopt the first rate hike in 3Q10. Morgan Stanley anticipates the will exit with '2 stages'. 'In spring, the Fed will start draining excess liquidity, then, by mid-year, begin to raise the fed funds rate to 1.5% by year-end and 2.0% in 2011'. The 3 factors triggering the Fed to exit are 'bottoming in inflation and a forecast that it will rise; sustained, solid growth and a similar forecast; and ongoing improvement in financial conditions'. Deutsche Bank expected the Fed funds rate will rise to 0.5% by 3Q10. 'The FOMC will likely begin the process of raising policy rates as soon as the unemployment has begun to decline noticeably and shows good promise of being on a sustained downward path'. However, Goldman Sachs believes the Fed will maintain the target rate at the current level through end-2011, mainly due to its inflation and employment forecasts. Goldman forecasts unemployment rate will peak in mid-2011 at about 10.75% while headline inflation rising into 1Q10 and then declining through end-2011. Core inflation will be close to 0% in 2011. 'It is very hard to see an economic justification for tightening policy when inflation is 1% or less and the unemployment rate is 10% or more, as we expect for 2010-11. Also, tightening could potentially come from other channels, such as fiscal restraint or unwinding the Fed's balance sheet. Lastly, we believe the Fed would rather err on tightening too late rather than too early'. 
ECB: During the course of crisis, the ECB has reduced the main refinancing by 325 bps to 1% which has been kept unchanged since May 2009. In accompaniment, the central bank also enhanced liquidity provision through fixed rate tender procedures with full allotment, outright purchase of euro-denominated covered bonds, widening of collateral pool, etc. Recently, the ECB President Trichet, while continued stating current interest rate level as appropriate, signaled that market conditions are 'stable enough' for the central bank to withdraw some of the emergency measures. At December's meeting, the ECB announced that December's 12-month refinancing operation will be the last one while the rate will be fixed at the average minimum bid rate of the main refinancing operations over the life of this operation. Concerning collateral for loans, the ECB is also considering reversion to the oil rules. Currently the ECB accepts bonds rated BBB- as collateral for loans. However, it may adhere to the old rule which requires minimum rating of collaterals to be A-. We see mixed opinions on whether the ECB will raise it policy rate in 3Q10. However, most believe that by the end of 2010, the central bank should have begun the tightening cycle. UBS views the ECB's December meeting as hawkish and believes that the ECB will be confident enough to raise rate (first hike to be in 3Q10) and continue to return to a more neutral policy stance sometime in H2 2010. 'Governor Trichet was very careful in repeatedly emphasizing that the initiation of the phasing out of unconventional measures and the decision to conduct the last 12-month LTRO at a variable rate should not be interpreted as a signal that policy rates are going up. But in our view, and as we have highlighted for some time, we expect the gradual phasing out of the unconventional measures to be followed with policy rates hikes, starting in Q3 2010'. Goldman Sachs forecasts the first rate hike (+25 bps) to take place in 4Q10 and lifted the 16-nation region's GDP growth. 'The strongest growth will be reported in the centre of the Euro-zone, as well as in those places that have seen FX depreciations over the past 12-18 months. Several smaller Euro-zone members may continue to struggle, causing a divergence in intra-European growth performance over the next couple of years'. Credit Suisse forecast the main refinancing will reach 2% by end-10. 'The ECB surprised markets with the form of the one-year unlimited fixed-rate refinancing operation, to take place on 16 December. By indexing the rate to the average MRO rate in the coming year, it's likely that the ECB hopes to limit the amount the tender is taken up. The ECB's forecasts for growth and inflation were fairly uncontroversial, with the key inflation forecast for 2011 at just 1.4%; there is no signal of an imminent change in the policy stance, in our view'. 
BOE: The BOE started cutting interest rate in December 2007 but the pace accelerated in 4Q08. In the 5-month period from October 2008 to March 2009, the policy rate was reduced from 5% to 0.5%, which is expected to stay until late-2010. Apart from lowering the policy rate, MPC members also announced a program by asset purchase of 75B pound in March 2009. Part of that sum was used to finance the BOE's program of private sector asset purchases through the Asset Purchase Facility. The amount was also used to buy medium- and long-maturity conventional gilts in the secondary market. In the first 3 months of the program, the majority of the overall purchases by value was of gilts. In each of the meetings in May and August, the Committee announced to increase the size of the program by 50B pound (100b pound in total) to 175B pound while deciding to keep interest rate at 0.5%. However, economic growth remained dismal and unemployment rate continued to rise. The nation's GDP contracted -0.3% qoq in 3Q09. This was the 6th consecutive decline and left the UK the only advanced economy in recession. Therefore, in November, members raised the size of the asset purchase program further, by 25B pound, to 200B pound. Other than buying assets, the central bank also considered other options of increasing liquidity such as reducing the remuneration rate of depositing money in the BOE. However, there's no decision yet. In early December, Morgan Stanley pushed back the timing of BOE's first rate hike to 4Q10 from May 2010. Although the MPC will want to get back to 'a more normal' policy setting 'once there isevidence that the economy is on a firm, sustainable path to recovery', 'the election and likely fiscal policy tightening will contribute to uncertainty about this path'. The MPC normally makes or announces important decisions at months with releases of quarterly Inflation Report. In 2010, the February Inflation Report will be affected to reversion of VAT to 17.5% from 15% while the May Inflation Report will coincide with the election. Therefore, Morgan Stanley expects 'even the independent Bank of England would probably baulk at taking such an important monetary policy step then' and 'unless we see either a dramatic upturn in inflationary expectations and/or a currency collapse, we expect no change in official rates until the political dust has settled '. Barclays Capitals forecasts the MPC will stop QE in January 2010 and raise rates in August 2010.'Most recent data revisions suggest that the Q3 09 GDP number will be revised higher, thus, perhaps, giving the MPC more confidence that a recovery is close'. However, the RBS anticipates the BOE will keep the rate at 0.5% throughout 2010 and will only start tightening in 1Q11 as economic outlook remains worrisome. 3Q09 GDP report 'revealed broad weakness across the economy'. Although 'government spending provided a lift, this was not enough to offset a decline in household spending and business investment'. 'Net exports' contributed most to the drag on UK growth. 'British exporters proved unable to capitalize on the return to growth in Britain's largest trade partners' In 4Q09, economy will likely post modest growth as suggested by recent activity surveys (PMIs). However, 'balance sheet strains are likely to exert a drag on the recovery through 2010'. 
BOJ: The Bank of Japan resumed the easing policy in October 2008 after keeping the policy rate at 0. 5% since February 2007. In December 2009, policymakers brought the rate to 0.1% which has been maintained until now. Apart from lowering interest rates, the central bank also adopted other measures to combat deflation and stimulate economic growth. In January, the BOJ outlined the principles regarding outright purchases of corporate financing instruments, and decided on the specifics of outright purchases of CP as well as agreed to examine outright purchases of corporate bonds. The central bank also broadened the eligible collateral categories. In the guideline also issued in January, the central bank accepts 'bonds issued by real estate investment corporations, dematerialized commercial paper issued by real estate investment corporations, bills drawn by real estate investment corporations, commercial paper issued by real estate investment corporations, and loans on deeds to real estate investment corporations as eligible collateral for the Bank's provision of credit and to add dematerialized commercial paper issued by real estate investment corporations and commercial paper issued by real estate investment corporations to the list of CP purchased with repurchase agreements'. However, economic expansion remained slow despite these measures while deflationary risk continued to linger. As urged by the Prime Minister, the central bank called for an urgent meeting in mid-December but the BOJ Governor Masaaki Shirakawa and his colleagues refrained from announcing more policy actions but sticking to a rate of 0.1% and a 10 trillion yen ($111 billion) lending program adopted in the previous meeting. Analysts expect the BOJ will implement more expansionary policies though it may not lower rates further. Goldman Sachs believes 'protracted deflationary conditions call for more aggressive QE, such as expansion of long-dated JGB bond purchases' in 1Q2010. Concerning economic growth, Goldman forecasts 'evenly paced GDP growth for 2010-2011, at +1.5% for 2010 (fiscal year +1.3%) and +1.6% for 2011 (fiscal year: +1.7%)'. 'Consumer prices will continue declining through 2011, although the decline should ease as the supply/demand gap gradually narrows. The growth path will inevitably be substantially affected by the fiscal-policy stance, including the slowdown due to the partial suspension of the first supplementary budget for FY2009 and the implementation of the primary FY2010 budget'. Morgan Stanley, apart from anticipating further rate cut to 0.05% in 2Q10, outlined several QE options for the BOJ. These include ' Increasing the current account balance, letting unsecured call rate guidance level drop temporarily, Repeated BoJ rollovers of JGBs, larger JGB purchases, clarification of commitment to policy duration, unsterilization of forex intervention funds and adoption of inflation targeting'. SNB: During the period between October 2008 and March 2009, the SNB cut the 3-month LIBOR target rate from 2.75% to 0.25%. In March, the central bank also announced to increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets. Since then, the EURCHF has rarely traded below 1.5. After adopting the ultra expansionary measures for so many months, the SNB took a first step in exiting from these policies by announcing an end to the purchases of Swiss franc private sector bonds in December. Moreover, there has been signs showing the SNB has worked less hard to intervene appreciation of Swiss Franc despite it retained the statement that 'the SNB will act decisively to prevent any excessive appreciation of the Swiss franc against the euro'. On December 18, The Swiss franc strengthened beyond 1.50 per euro for the first time since March. When asked, the SNB Spokesman declined to comment. However, we saw that EURCHF continued to decline afterwards, suggesting the central bank does not care about it as much as before. UBS anticipates the first rate hike will occur in 3Q10 and the SNB has turned soft in intervening FX. According to USS, 'Despite largely unchanged Swiss economic forecasts by the SNB and accounting for the fact, that the SNB reiterated the possibility of FX interventions once again, we nevertheless do not expect the cross to move much higher from current levels. On the contrary: Having been prepared to counter any CHF appreciation vs. the EUR, the latest SNB statement suggests, that the 'SNB is to counter any decisive appreciation of the CHF vs. the EUR from here. We interpret the changed wording to the degree that the SNB is now prepared to accept a gradual lowering of the intervention levels in EURCHF, as a sort of monetary tightening going forward'. Credit Suisse holds similar view that the first rate hike will take place in 3Q10 as the SNB's new inflation forecast remained 'practically unchanged' and the central bank still did 'not fully rule out any deflationary risk' . Concerning economic development, Credit Suisse believed the pace of recovery in Switzerland is faster than that in the Eurozone. 'Swiss employment has already exceeded its pre-crisis peak. The sharp acceleration in broad money growth to four-year highs suggests inflation risk for H2 2010. Ultra-low mortgage rates have pushed mortgage growth and Swiss property prices to historical highs. This implies an asset inflation risk if these trends continue. As such, we expect the SNB to begin its exit from intervention in 1Q10. Compressed yield differentials give Swiss investors little incentive to recycle Switzerland's current account surplus abroad'. RBA: After reducing the cash by 450 bps to as low as 3%, increasing average maturity of repos, offering findings of 6 months and 12 months, etc, the Australian economy recovered more rapidly than its counterpart. Although GDP contract -0.9% qoq in 4Q09, it went back to the positive territory in the next quarter, technically preventing the economy from falling into recession. The number of payrolls has increased for 3 consecutive months since September while unemployment also seemed to have peaked at 5.8% in October. These positive developments triggered the RBA to raise its policy rate, by 25 bps each month, in October, November and December. Being the first central bank to adopt aggressive rate hike after the deepest global recession since World War II, the RBA considered it has already made 'material adjustments' to the stance of monetary policy. The next meeting will be held in February and the economic developments in these 2 months should be crucial for the central bank's action. There are diverse opinions about whether the RBA will pause or raise at February's meeting but most analysts forecast that the rate will reach 4% in 1Q10, suggesting a pause will either be in February or March. Goldman Sachs said after December's RBA meeting that 'the risks of a near-term pause have clearly increased but at this stage we continue to expect a 25bp rate hike at each of the next three RBA rate meetings (February, March & April). Domestic data flow subsequent to the December meeting has continued to surprise on the upside. Our expectation is for growth momentum to continue to surprise the RBA's most recent forecasts over coming months'. Deutsche Bank expects 'a very good 4Q09 CPI, scheduled for release on January 27, to reinforce the view that the RBA is well ahead of the curve and under no compulsion to accelerate its “gradual” pace of lessening stimulus. Despite this, the final decision in February is likely to come down to how strongly consumer spending and the retail sector perform over the critical holiday trading period'. Deutsche Bank anticipates the RBA 'hiking a further 25bps in Q1 but then sidelining itself during the middle of the year before resuming hiking in Q3, around the same time that the U.S. Fed begins its own rate hike cycle'. 
RBNZ: The RBNZ lowered the OCR by 575 bps to 2.5% during the period of June 2008 and April 2009. At the same time, the central bank also facilitated liquidity through measures including Term Auction Facility, which enabled banks to borrow funds using bills, bonds and mortgage-backed securities as collateral. Since April 2009, the RBNZ has mentioned in the post-meeting statement that there's no urgency to begin withdrawing monetary policy stimulus, and 'we expect to keep the OCR at the current level until the second half of 2010'. However, the tone has turned less dovish at December's meeting as policymakers said that 'if the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010. Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action'. GDP contracted for 5 quarters before moving back to the positive territory in 2Q09. Housing prices have been picking and employment conditions have been recovering. According to the RBNZ governor, Alan Bollard more strength has been seen in the job market and 'in a couple of quarters there will be a turning point. We expect” the jobless rate “to peak at 6.8%'. The market mixed opinions on whether the RBNZ will increase the OCR in 1Q10 but there's also a consensus that rate hikes will be well-in-place by 2Q10. Barclays Capitals anticipates, although the RBNZ has been downplaying the possibility of tightening so as to avoid excessive currency appreciation, the OCR will reach 3% by 1Q10 due to upside surprise on inflation. TD Bank expects New Zealand to return to trend growth in 2010 as 'a revival of the housing sector and the dairy sector are related to ongoing very low cash rates and favorable global demand lifting key commodity prices respectively, not via outsized assistance from the public sector'. 'Early in 2010 the RBNZ will pull the trigger and excess monetary stimulus will slowly be scaled back'. 'We were of the view that the RBNZ could start 2010 with a bang by lifting the OCR as soon as January, but ongoing dovish tones means this timetable has been pushed back to March 2010, three months earlier than the crowded consensus of June 2010'. Deutsche Bank believes the RBNZ will begin lifting the OCR with a +50bp hike at the April 2010 review. While there's little risk that the RBNZ will begin the tightening cycle in March. There is a 'considerable risk that the cycle starts with either a smaller hike or a slightly later hike at the June 2010 meeting'. 'Developments in global sentiment (including that expressed by other central banks), retail spending, credit growth and inflation will be especially important to monitor over coming months'. 
BOC: The Bank of Canada joined other central banks in the developed economy to aggressively reducing interest rates to unprecedentedly low levels. In fact, the BOC began the easing in December 2007 and in 17 months' time, the central bank's overnight rate has been lowered by 425 bps to 0.25%. Furthermore, in order to provide liquidity to the public, the central bank also adopted measures including Term Purchase and Resale and term loan facilities. Although the economy exited from recession in 3Q09, the growth of +0.8% qoq disappointed the market. At the accompanying statement of December's meeting, the BOC said that 'the composition of aggregate demand is shifting towards final domestic demand and away from net exports'. However, 'the balance of these shifts resulted in weaker-than-projected GDP growth' in 3Q09. The market basically expects better improvement will be seen in 2010 and the BOC may be rewinding its stimuli more aggressively then the Fed. Morgan Stanley believes domestic demand in Canada will be driven by consumer spending. 'The BOC remains concerned about a growth drag from net exports but the latest data and the recovery in global demand suggest that the negative impact may be less severe than initially expected'. Inflation rate will also return to normal faster than the BOC projected due to 'rebound in housing prices and wages and the run-up in energy prices'. Morgan Stanley forecast the BOC to raise rate in April, compared with consensus that the first rate hike will take place in 3Q10. RBC expects the first rate increase to come next summer as the 'slow start to Canada's economic recovery suggests that the Bank of Canada will retain its commitment to a 0.25% overnight rate until mid-2010. Inflation rates remain below the Bank's 2% target and the unemployment rate is forecast to peak in early 2010, indicating that there is considerable slack in the economy'. 
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