Week of central banks' surprises

Source: Dukascopy Bank SA
Major central banks continued to surprise market analysts and economists by their unexpected policy moves. The Danish central bank unexpectedly cut its interest rates as it sought to temper investors' interest in the Danish Krone, as market participants are looking for other triple-A rated European countries to park their cash. Nationalbank slashed its deposit rate to minus 0.2% from minus 0.05%, and the lending rate to 0.05% from 0.2%. In the UK, two policy makers of the rate-setting Monetary Policy Committee, who insisted on the need to raise interest rates in the near term, changed their mind and joined those, who advocated for keeping rates unchanged, which raises speculation the Bank of England will refrain from raising interest rates until next year. Thus, nine-member panel unanimously voted to maintain the BoE's interest rate at 0.5% and the size of its asset portfolio at 375 billion pounds.
The Bank of Canada also suddenly lowered the target for its overnight rate by a quarter of a percentage point to 0.75%, for the first time since 2009, responding to the recent precipitous decline in oil prices, which is estimated to be negative for the Canadian economic growth and underlying inflation. The central bank forecasts that oil prices will rebound slightly to $60 per barrel over the medium term, but policymakers believed that the negative effect of lower crude prices would be gradually mitigated by a robust US economy, a weaker Canadian Dollar, and the central bank's monetary policy decision. The BoC sees the economy to steadily recover in the second half of the year, with real GDP growth averaging 2.1% this year and 2.4% in 2016. The economy is projected to return to full capacity around the end of 2016, a little later than was expected in October.
But the key bombshell came from the Euro zone, where Mario Draghi, the head of the European Central Bank announced full-blown QE programme in an ambitious attempt to save the Eurozone's economy from being trapped in long-term economic stagnation. The European Central Bank agreed to purchase government bonds worth 60 billion euros a month, which is slightly more than was expected by many analysts, who had called for 50 billion euros a month. The ECB will be buying government bonds, debt securities issued by European institutions and private-sector bonds starting from March 2015 till at least September 2016. Such a decision would pump large amounts of money into the financial system that could then used by banks and other lenders to boost available credit. Consequently, that could spur consumer spending and act as a support to economic growth. The risks associated with the bonds issued by EU institutions will be shared; however, purchases of other government bonds will not be subject to loss sharing, Draghi said.
Meanwhile, in the Western part of the world, the world's second biggest economy continued to grow at the slowest pace in almost six years in the fourth quarter of 2014, with the annual rate of expansion coming in at the weakest level in 24 years. China's economic output rose by 7.3% in the December quarter, unchanged from the previous three months, translating into an annual growth of 7.4% for 2014, down from 7.7% in the preceding year. The slower growth in China has been reflected around the world, pushing commodity prices significantly lower and weakening already fragile global economy.

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