Fed members argue on first rate hike timing, BoE cut its outlook

Source: Dukascopy Bank SA
Debates among Fed's hawks and doves are intensifying, as policy makers ponder when to start normalizing monetary policy in the world's biggest economy. Federal Reserve Bank of Philadelphia President Charles Plosser said that the Fed should hike short-term interest rates "sooner rather than later", welcoming at the same the central bank's recent decision to move towards ending its easy-money policy stance. Plosser argued that waiting until the Fed fully meets its goal for maximum employment or reaching inflation target of 2% to start raising interest rates may be risky as it could put the bank's monetary policy behind the curve. Thus, interest rates should be raised from the current ultra-low levels, as it would allow to do so in a more gradual manner as fundamentals strengthen, "rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act," Plosser said. Meanwhile, New York Fed President William Dudley said it is still too early to raise interest rates as inflation is running below the central bank's target.  He also pointed out a potential benefit of allowing the US economy run "slightly hot" for some time given that the long-term unemployment rate is still very high.  Dudley added that recent non-farm payrolls data had not altered his policy outlook in any meaningful way. Dudley said he anticipates the first monetary policy tightening to come sometime next year if the American economy grows as expected. Wall Street's biggest banks as well as market participants remain convinced the US central bank will raise interest rates by June 2015.
Across the Atlantics, the Bank of England cut its near-term inflation projections, but stressed that it expects inflation to return to the central bank's official target by the end of the three-year forecast period. The BoE see the inflation gauge falling to 1% by the first quarter of 2015. The central bank also signalled later-than-expected first interest rate lift, pushing it from February to October of 2015, noting those expectations are in line with the inflation outlook for the three-year forecasting period. The BoE said it expects the British economy to expand 3.5% in 2014, but projects growth will slow in 2015 and 2016. It revised downwards its forecast for annual growth in 2015 to 2.9% from 3.1% in August and its outlook for 2016 to 2.6% from 2.8%.
The latest RBNZ's financial stability report highlighted that still-unsustainable level of the nation's currency as well as increasing exposure to China have raised risks to the country's financial stability. The New Zealand currency has lost around 10% versus the US Dollar from its recent high in July, and around 5% on a trade-weighted basis. Nevertheless, the RBNZ believes that the depreciation has been less than the decline in New Zealand's export commodity prices over the past year, which is placing great strain on exporters, particularly in the dairy sector. In addition, China currently makes up around 20% of New Zealand's exports, with robust demand for dairy products fuelling growth in the trade relationship over the past few years. Chinese demand is expected to recover from a lull early this year, the RBNZ said, as Chinese inventories of dairy from 2013 diminish.

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