BOE Voted Unanimously To Keep Rates Unchanged, First Time Since May 2010

The BOE minutes for the August meeting turned out to be more dovish than expected as 2 hawks, Spencer Dale and Martin Weale, stopped pushing for a rate hike, making the decision to hold the Bank Rate unchanged at 0.5% unanimous for the first time since May 2010. Adam Posen continued to favor expanding the asset-buying program by +50B pound to 250B pounds. The pound slid after the minutes as it's increasingly likely that the central bank will adopt further easing.

Policymakers acknowledged the slowdown in economic activities with the greatest downside risk coming from the Eurozone. As mentioned in the minutes, 'evidence of slowing activity, and more particularly, concerns about fiscal policy in the U.S. and the substantial challenges faced by the euro area, had resulted in stressed conditions in financial markets' and 'news over the month had generally reinforced the weak tone of indicators of global activity growth over the past few months'. Indeed, the BOE revised lower the growth forecasts for the UK in light of the current headwind.

It's rather unexpected that the Committee voted unanimously for the first time in more than a year to keep interest rates unchanged. Spencer Dale and Martin Weale, who had favored a rate hike of +25 bps, voted to maintain the Bank Rate at 0.5%. According to the minutes, the 2 members 'remained particularly concerned about risks to the upside associated with a sustained period of above-target inflation'. However, recent developments had 'weakened' the case of tightening.

As far as the asset-buying program is concerned, the minutes unveiled that some members 'considered whether there was a case for increasing' the size. However, the conclusion was that there 'was not yet strong enough' evidence to support the move. Policymakers stated that further increase in the size might 'become warranted were some of the downside risks to materialize'. Adam Posen retained the view that 'the balance of risks to inflation continued to warrant an immediate expansion' of asset purchases. Posen believed that the weak pattern of demand domestically and overseas had evolved broadly as expected…There remained a significant margin of spare capacity' and it's like that 'inflation would fall below the target in the medium-term'.

RBNZ Will Probably Not Raise Interest Rates Until 2012

The RBNZ left the OCR unchanged at 2.5% and delivered a less hawkish statement in September. Where these have been widely expected, NZD fell after the announcement as the chance of a rate hike this year has markedly reduced given global economic uncertainty. The central bank also trimmed growth and inflation forecasts, signaled the macroeconomic shock in the US and Europe would have some impacts on New Zealand's path of recovery.

Concerning global economic developments, the central bank noted that the global economy has slowed 'sharply'. Financial market sentiment has 'deteriorated' and if the tightening condition of in international bank funding markets does not improve, New Zealand bank funding costs will increase.

Fortunately, the global turmoil has not yet affected New Zealand's economy significantly. According to Governor Bollard, the country's economy has 'performed relatively well while headline inflation has increased' somewhat from 3 months ago. However, risks remained there and will likely increase in the second half of the year. Exports will be negatively affected as New Zealand's trading partners has 'deteriorated markedly' and New Zealand dollar has appreciated a lot against major currencies. The RBNZ warned that strength in NZD is having a 'dampening influence on some parts of the tradable sector and on imported inflation'.

In the quarterly MPS, the RBNZ lower its growth forecasts for the year ended March 2012 to +3.6% and March 2013 to +2.6% from June's projections of +4.4% and +3.6% respectively. The downward revisions were to large extent driven by the reductions in trading partners' growth. Inflation forecasts were also trimmed and CPI is expected to rise to +2.1% in March 2012 and then ease to +2.0% in March 2013 before soaring to +2.2% in March 2014.

While keeping the policy rate unchanged, given 'the recent intensification in global economic and financial risks', at this meeting, the RBNZ continued to forecast a future rate hike, if 'recent global developments have only a mild impact on the New Zealand economy'. Yet, it seems that policymakers will wait until 2012 for the first hike as suggested by the 90-day bill rate.