Decision week recap – 29/01/16 by Michela Jaccarini

Good morning all! This has been a busy week, one which we may call decision week! The FED left the interest rates unchanged as did New Zealand at 0.5% and 2.5% respectively, while the Bank of Japan cut interest rates to -0.1%.

In the statement following the US interest rate decision, it was stated that the labour market has strengthened even though economic growth slowed down slightly. The housing sector has also improved however inventory investment has slowed down. Inflation has also been well under the Committee’s 2% inflation target however the Committee will still keep maximum employment and price stability at the forefront of business. In the near term, inflation is expected to remain low, especially because of the current slump in energy prices, but should rise to 2% in the medium turn. Towards the end of 2015, the overall outlook was not good and the start of 2016 wasn’t much better! However, the progression towards the 2% inflation target will depend on the global economy as well as US economic data. The probability of a quarterly rate hike happening in March has now fallen to 34%.

As expected also, New Zealand kept the interest rates unchanged however hinted at the possibility of a rate cut some time this year because of low inflation. It is believed that the current impact on oil is only temporary and that although current inflation figures of 1.6% is very close to the target of 2%, the outlook on inflation is falling. The RBNZ Governor Graeme Wheeler expects New Zealand’s economic growth to advance this year but acknowledges the risks that could determine this growth such as China, dairy prices, global market conditions, net immigration and pressures in the housing market.

Early this morning Japan shocked the market by cutting interest rates to -0.1% in an attempt to protect the country from market volatility after years of keeping them at the lower end of the positive range and could be cut further in the future if necessary. This rate cut simply means that it is futile to keep money in the bank; the purpose of this cut is to enhance public spending to strengthen the economy. This move also encourages commercial banks to use excess reserves they keep with the central bank to lend to businesses; this will encourage investment and growth.

Good luck!