Through TheFLY's Eyes: global monetary policy

from Joseph Lazzaro of Theflyonthewall.com
















The BOE's Surpise: A Mid-Winter Rate Rise

The Bank of England didn't pull a fast one on international markets Thursday, but it was close.

The Bank of England unexpectedly increased its benchmark interest rate - called the repurchase rate - by one-quarter point, or 25 basis points, to 5.25%, its third increase since August 2006.

The BOE said "CPI pressure was 2.7% in November. It is likely that inflation will rise further above the target in the near-term, but then fall back as energy and import price inflation abate."

While an argument can be made that CPI pressure in the U.K. is elevated, the BOE's move nevertheless took economists, traders, and analysts by surprise.

While central banks must set monetary policy to meet national economic objectives, the world's four major central banks [The U.S. Federal Reserve, European Central Bank, Bank of England, and the Bank of Japan] also are aware of each bank's impact on the global economy. Further, in general, unless the global ecomomy is experiencing runaway growth, the four banks do not generally raise interest rates in unison, as the policy is considered too restrictive and could slow the global economy to a crawl, even cause a recession.

The Fed has recently paused after a rate-rise cycle designed to slow the U.S. economy [and by impact, the global economy], and that has resulted in a 5.25% Fed target rate. And, not surprisingly, the U.S. and global economies slowed. Meanwhile, the ECB and Bank of Japan have also been in rate-increasing mode. However, prior to Thursday's surprise BOE decision, most analysts thought the BOE would remain on hold.

But the BOE did not, and as a consequence the global economy now has all major central banks either in rate-increasing mode or having paused from a recent rate-increasing cycle.

And if you thought economists will now even more closely monitor the global economy for signs of anemic GDP growth, you're right.