World central banks signal sea change; keep rates at record low

World central banks signal sea change; keep rates at record low

London: Four central banks left interest rates at record lows on Thursday but South Korea signalled its thoughts were turning to tighter policy while Canada talked up recovery hopes.

The Bank of England left interest rates at a record low of 0.5% for the sixth month running and said it would keep its £175 billion asset buying programme, designed to pump money into the economy, in place.

Canada held rates at just 0.25% and repeated a pledge to keep them there until the midpoint of 2010. But it said the second half of 2009 could see stronger GDP growth than it had previously expected.

“GDP growth in the second half of 2009 could be stronger than the bank projected in July," the Bank of Canada said in a statement.

Bank of Korea kept interest rates at a 2.0% low set seven months ago and sent a strong signal it would lift them if house prices climb much more, even if it means moving before other major central banks.

Analysts said a tightening could come as soon as November.

Governor Lee Seong-tae said, “There’s no problem at the moment with the consumer prices and international balance of payments but I am worried about the housing sector."

New Zealand’s central bank was less hawkish, leaving its key interest rate unchanged at a record low 2.5%, but dropped a previous reference to rates maybe moving lower.

RBNZ governor Alan Bollard told Reuters Television that financial markets were getting too far ahead of themselves and said he expected no move until the latter part of 2010.

The markets, however, are still discounting a rise by March.

“In terms of when the markets expect the first hike, it’s still around March. That hasn’t changed despite what the RBNZ has said," said ANZ-National senior markets economist Khoon Goh.

Debate is heating up about when and how to reverse the huge monetary and fiscal shots in the arm given to the world economy since the collapse of US bank Lehman Brothers a year ago.

Finance ministers from the G20 economies agreed last weekend that now was no time to reverse the trillions of dollars of stimulus pumped into the world economy.

Even China, a key engine of world growth in recent years, is not ready to turn the taps off yet.

Premier Wen Jiabao said on Thursday China would unswervingly apply its policy mix of massive government spending and loose money because its recovery remains fragile.

But as signs of economic life become more firmly entrenched in much of the world, the reckoning hour is approaching and with it the risk that withdrawing stimulus could stop fragile economic growth in its tracks.

Differing paths

With nations recovering at different rates, reversal of monetary policy will not be uniform. Those hardest hit, like Britain and the United States, are likely to lag.

“Different signs of stabilisation have become apparent recently in the euro zone as well as in the rest of the world," European Central Bank Governing Council member Yves Mersch said in a report issued on Thursday by Luxembourg’s central bank.

Britain’s central bank has stood out from the crowd, actually upping its bond-buying programme to £175 billion last month and three on its rate-setting committee, including governor Mervyn King, wanted an even bigger increase.

On Thursday, it said it would take two more months to exhaust that money and it would keep the scale of the programme under review—leaving the option open for yet more stimulus.

Reuters polls predict first rate rises in the United States, euro zone and Britain not before the third quarter of 2010.

Britain did not exit recession in the second quarter, as France and Germany did, but its economic data has improved and could yet hasten a rate rise here too.

“If the economic data continues to improve, we could see the first interest rate hike in the first quarter of next year," said Philip Shaw, chief economist at Investec.

The European Central Bank left rates at 1.0% last week and, echoing the G20 ministers, said it was too early to withdraw support from economies creeping out of recession.