In this article I will provide you with a summary of what the central banks around the world are saying about the world economy and what they are doing in relation to monetary policy. With this information you should be able to draw your own conclusions regarding the direction of the individual currencies.
What Are the Central Banks Doing in Different Countries?
This week Australia appeared to be the first to hit the news with the Reserve Bank of Australia leaving the cash rate fixed at 0.25% with Governor Philip Lowe mentioning that the RBA board is considering the global economy is recovering slowly after a contraction due to the COVID-19 pandemic. The recovery appears to be being led by China and that inflation across world economies remains low. This is an example in Australia where the inflation rate decreased by 1.9% seasonally adjusted. Mr Lowe mentioned that the Australian Dollar remains just below the high of the last few years.
In Australia the Government has eased fiscal policy substantially by providing stimulus to Australian businesses since March 2020. The government announced in August 2020 an extension to the stimulus packages to business which is scheduled to phase by 31 March 2020.
Unemployment in Australia did not reach expected levels due to the subsidies that the government is providing to businesses to ensure that people remain employed while the country is trying to come out of the pandemic.
Mr Lowe has stated that the RBA policy settings are doing what they expect and that the bank is ready to support employment and business to survive the pandemic and the Board is considering other options to support jobs and business.
On Tuesday 6 October the Government announced their budget for the next financial year and this was received reasonably well by business and critics. The government announced several additional stimulus and support packages to create jobs and enable the country to exit the pandemic with a reasonable standard of living and to protect Australian jobs.
The Government announced that government debt in the 2019/20 financial year would increase to $703.2 billion up from $491.2 billion in the 2019/20 financial year.
The government has announced $14 billion in additional infrastructure spending to support jobs and they have announced other stimulus to assist in this area as well.
The overall budget deficit is forecast to be $213.7 billion down from a forecast surplus of $6.1 billion.
The COVID-19 pandemic and the natural disasters over the previous Australian summer have impacted on the budget and are the major factors in the deficit.
2. United States
The minutes of the September 2020 meeting of the Federal Reserve Bank (FRB) show that all participants in the meeting expect Gross Domestic Product to decrease across the country for the remainder of 2020. The minutes cite a reduction of 3.7% which show that the forecast is a lower reduction than at the June Summary of Economic Projections which forecast GDP to reduce by 6.5%. The minutes show that all participants in the meeting have forecast that GDP will grow in the median term and this should start happening in 2021.
All participants in the meeting forecast that the unemployment rate would fall for the remainder of 2020 and that this trend will continue into 2021.
The participants all suggested that the economic recovery would take some time and that unemployment should be below its long term level by the end of 2023.
All participants forecast inflation to be at 1.2% for the remainder of 2020 and most participants expected inflation to rise over the next three years. Some of the participants expected one of the inflation measures to be above the long term target and then move below. It seems that there are mixed forecasts within the FRB as others stated that this measure of inflation will be above the long target by 2023.
All participants expressed concern about the risks to the economy of the ongoing pandemic and the course that it will take in the short term.
There was concern about a second wave of the virus and this could have negative effects on all the economic measures within the economy.
The other unknown within the USA is the presidential election as this I am sure is having an effect on the US Dollar as Joe Biden is ahead in the opinion polls and as we know Donald Trump has recently “recovered” from COVID-19 and he is back on the campaign trail.
The election is going to be close and there are media outlets in the US that are saying that it could take weeks to determine the result in the election. Given this information who knows what impact this will have on markets.
Who will be the best person to manage the US economy? I don’t know as I am not close enough to the electoral or political system in the US and I am a casual observer from a very large distance.
If Americans vote the wrong way it could cause issues in currency markets as well as in the sock market not only in America but worldwide.
3. United Kingdom
Governor Andrew Bailey delivered a speech on October 8 2020 and as at the time of writing the text has yet to be posted to the BoE website.
I will update everyone when this speech is posted on the BoE website.
There are some statistics that I have been able to find for the UK and they are;
Unemployment rate is 4.1% for the period May – July which was up from 3.9% in the previous quarter and 3.8% in the previous year.
GDP for the UK grew by 2.1% in August 2020 compared to June. GDP in April declined by 19.5%. GDP grew by 8.0% in the period July to August 2020 compared to the previous quarter.
The CPI Inflation rate for August 2020 was 0.2% which was down from 1.0% in July. I am unable to determine from any of the data the annual inflation rate.
The BBC website is now reporting there are 13,854 new cases of COVID and there were 87 new deaths since the second wave of the virus.
Given that the Northern Hemisphere is about to come into winter then these numbers may get worse as time goes on.
Last week the Pound moved up against the US Dollar and the Japanese Yen. There may be issues going forward especially if the number of cases gets worse over the coming weeks and also if the economy is shut down to restrict the number of infections.
“The financial system is helping Canadians, but risks remain” this is a heading on the BoC website for the link to Governor Maklem’s speech to the Global Risk Institute on October 8 2020.
The Governor reiterated what other Central Banks are saying and that is that the longer this pandemic lingers then the impact will be adverse for jobs and also incomes and will then transfer to mortgages especially those people that have large debt.
As with Australia the repayment deferrals for those mortgage holders that applied for a deferral is about to end and if the job market does not improve and incomes return to pre pandemic levels then there may be mortgage defaults.
The same holds true for businesses in industries such as hospitality that are still suffering from the effects of the pandemic and especially those that are carrying large debt. This could become a bigger problem for the Canadian economy the longer the pandemic is around or the longer the recovery takes.
Governor Maklem said,
“Canada’s financial system has shown its resilience. It continues to work as a shock absorber, helping Canadian households and businesses deal with the economic impact of the pandemic.”
As with other economies that have introduced subsidies and programs to assist their economy the volume of debt will have a bearing on the financial system in the future.
As with other economies Canada has low interest rates and there may be an increase in the cost of housing and an increase in the debt levels of people that may not be able to afford it.
From the unemployment data that was released on Friday 9 October the level of unemployment reduced on the rate that was reported in August 2020. This would mean that the economy is recovering very slowly from the effects of the virus.
The biggest issue for Canada and all Northern Hemisphere economies is the second wave of the pandemic which could send the Canadian economy backwards and and the recovery will slow especially during the northern winter.
As we can see the economies that have been discussed above are experiencing similar issues internally to do with the COVID-19 pandemic and the impact that this is having on GDP and unemployment. As discussed the Australian government is spending heavily on stimulus and the country is about to experience summer so hopefully the rates of infection across the country will fall.
In the Northern Hemisphere winter is coming and I think the fear across Europe and the US and Canada is what will COVID do this winter? When will we be able to use a vaccine?
These are all interesting questions and throw into the mix an election in the US and we have some very interesting times ahead.