Top central banks stick to current policies but stay on the alert

Many major central banks last week decided to leave their policy rates and policy stance untouched, but they all sent signs of possible further easing if necessary.

They were the Reserve Bank of Australia, Bank of England, European Central Bank and Bank of Japan.

Risk sentiment had been awakened, reducing demand for safe-haven assets. Recent actions indicated that the global economic situation is now on a path to recovery and central banks' activities are effective.

In the United States, the latest data showed strong signs of improvement, with non-farm payrolls increasing by 236,000 in February, leading unemployment to drop 0.2 percentage point to 7.7 per cent. As far as job data are concerned, the stronger-than-expected result has significantly supported the dollar and raised the chances of the easing policy being withdrawn sooner than expected, as the unemployment target is 6.5 per cent.

At the same time, China has confirmed to markets that Asian countries still have sustainable growth. China showed double-digit growth, 21.8 per cent year on year, in the export sector in February, beating the forecast of 10.1 per cent. The Consumer Price Index also rose 1.1 per cent month on month and 3.2 per cent year on year in February, well above expectations.

In Japan, it seems that the policies under Prime Minister Shinzo Abe are working after he pushed the Bank of Japan to change its inflation target to 2 per cent.

Haruhiko Kuroda, president of the Asian Development Bank, was nominated as the next BOJ governor. He is expected to support aggressive monetary easing. The first policy meeting for the new leadership is scheduled for April 3-4, with outgoing governor Masaaki Shirakawa chairing his final meeting last Wednesday and Thursday.

The government also nominated as deputy governors Kikuo Iwata, who supports unconventional monetary policies, and BOJ official Hiroshi Nakaso.

Kuroda advocated the use of an inflation target before the central bank adopted the programme in January, and he has said that additional easing can be justified this year. The yen remains under pressure and recently touched a three-and-a-half-year low against the dollar after US job data released last Friday helped support Japan's export sector.

Thailand last week also get a stronger positive after Fitch Ratings upgraded the long-term foreign-currency issuer default rating to "BBB+" from "BBB" with a stable outlook.

The Italian political deadlock has put the euro under pressure, as a new government there could not be formed after the centre-right coalition of Silvio Berlusconi gained the majority of seats in the Senate, while the centre-left, led by Pier Luigi Bersani, won the most seats in the lower house, with no party achieving a clear majority.

Regarding political uncertainty, the third-biggest economy in Europe is concerned about the sustainability of its economic growth, and the situation seems to be getting worse. Fitch downgraded Italy to "BBB+" from "A-" with a negative outlook, citing the inconclusive election and ongoing recession. Fitch also said Italy's rating could be cut further if the recession goes deeper and longer than anticipated.

Comments by Christine Lagarde of the International Monetary Fund to the tune that monetary policy should remain accommodative and that there is still some limited room for the European Central Bank to cut interest rates in the near future have put the euro under more pressure.

As far as monetary policy is concerned, the focus this week is on the meetings of the Reserve Bank of New Zealand and the Swiss National Bank tomorrow. Their policies are expected to be unchanged like those major central banks. Even though the outcomes will not affect the foreign-exchange market much, we will see what the major central banks will do during this fragile recovery period. Are we at a turning point?

Duangkamon Phunkaew is an assistant vice president in the treasury division of Bangkok Bank.