Financials – Interest Rates & Central Banks

It seems that, after all, the FED was a prognosticator on how best to save the US economy by using unconventional tools. At one point in time, we even thought the FED was playing Dr. Frankenstein by using quantitative easing (QE) to supercharge the stock market. While they could have created an unstoppable monster, it seems that it has worked well so far.

Now, it’s time for Mario Draghi, President of the European Central Bank (ECB) to play on the same playground. On March 10th, the ECB not only reduced its interest rate to zero, but also boosted its QE operation from 60 billion euros to 80 billion euros.

“The Governing Council expects key interest rates to remain at present or lower levels for a long period of time and well past the horizon of our net asset purchases,” Draghi said. Based on the current view, “we don’t anticipate it will be necessary to reduce rates further.”

In Canada, we are patiently waiting for the first Liberal Government’s budget to see how the new government intends to revive the ailing Canadian economy. So far, we have the natural resources and energy sectors that are struggling in a massive way. The latest oil price increase should put a small Band-Aid on this heavy wound. On the other hand, we have the service and manufacturing sectors taking the lead to pull the Canadian economy’s head right above water. Here’s what we can read from the Bank of Canada’s latest statement on interest rates:

“Prices of oil and other commodities have rebounded in recent weeks. In this context, and in light of shifting expectations for monetary policy in Canada and the United States, the Canadian dollar has appreciated from its recent lows. With these movements, both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR.

Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector.”