ECB, BoE, BoC Review: No Surprise - All Keeping Rates Unchanged With No Further QE

ECB

As widely anticipated, ECB decided to keep the main refinancing rate unchanged at 1%. According to the accompanying statement, the central bank stated that ‘The current rates are appropriate taking into account our decisions of early May, including the enhanced credit support measures, and all the information and analyses which have become available since then'. Same as the previous meeting, President Trichet refused to comment about the future, neither on whether the current rate has reached a floor nor on expansion plan of the asset buying program.

Concerning the 60B euro program to purchase euro- denominated covered bonds, Trichet said the central bank will start buying covered bonds rated at BBB or above in the primary and secondary markets from July 09 to June 2010. The plan takes longer than expected and it may reduce the impact of the policy. Trichet also said that the asset buying program is that it may not be explicitly sterilized (sterilized - no printing of new money), though the policymakers expected it to be implicitly sterilized though repo facilities.

June's Staff Projection came in lower than forecast. Mid-point forecast for 2009 GDP was revised down to -4.6% (between -5.1% and -4.1%) from -2.7% as projected in March. For 2010, GDP was anticipated to have contracted -0.3% (between -1% and +0.4%), compared with March's estimate of 0%. Concerning inflation, CPI was forecast to ease to +0.3% (between +0.1% and +0.5%) and +1% (between +0.61% and +1.4%) in 2009 and 2010, respectively. Despite the below-consensus downward revision, the central bank stated there's little risk of deflation and credit crunch in the 16-nation region.

Going forward, we believe ECB will be rather slow in adjusting interest rates and introducing new unconventional easing programs although the economic outlook in the Eurozone remains bleak. From the post-meeting statement, the press conference as well as the speech by Germany's Chancellor Angela Merkel earlier this week, we believe that many members in the government council are still reluctant to go further on the monetary or unconventional easing program.

BOE

As expected BOE left its policy unchanged at 0.5% and retained the existing 125B pound asset buying program. The post-meeting statement came in short without commenting on economic development. MPC did not mention whether they will seek the Chancellor's approval on extending the QE program to beyond 150B. The policymakers also did not talk about extension of the maturity of the bonds they are buying. In fact, judging from recent market development, we do not anticipate expansion on the QE program. The MPC's raise of inflation forecast in May's inflation report and better-than-expected economic data suggested that market condition has improved and there's increased chance for policymakers to show inflation forecast of 2% (target rate) in Augusts' report.

BOC

BOC kept the overnight rate target at 0.25% and reiterated to keep it at current level until the end of the second quarter of 2010 so as to achieve the inflation target. Concerning economic outlook, the central bank believed medium-term outlooks for output and inflation are broadly inline with forecasts in April's Monetary Policy Report. Canada's economic prospect is uncertain while inflation projection is skewed to the downside. BOC particularly mentioned that the ‘unprecedentedly rapid' rise in Canadian dollar, if persistent, could offset improvement in financial conditions, commodity prices and confidence.

Since the meeting in April, CAD has risen 10% against the dollar as driven by rally in commodity prices and selloff in USD. If CAD's appreciation persists, it's effectively tightening monetary policy and negative for exports, hence the nation's economy.