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Short-Term Interest Rates since January 2007

From the Federal Reserve Bank of Dallas:

Bank of Canada Expected to Raise Rates Tomorrow

To 1% - the third increase since June.  The Bank of Canada's goal is to keep inflation at the 2.0% target, which is expressed in terms of total CPI inflation.  Meanwhile, the Federal Funds Rate has had a target range of 0-0.25% since December 2008.  Canada's most recent inflation report indicated a rate of 1.9% for July; however, according to a Bank of Montreal economist: “The risk of keeping rates too low for too long is probably a little more pressing in Canada...“You’ve got jobs, you’ve got a healthy banking system, and you’ve got consumers that do still have some capacity to take on more debt. That’s why Canada has to be a little bit more careful, a little bit more pre-emptive, in dealing with interest rates than the other central banks.”

Update, September 8: The Bank of Canada today raised its target for the overnight rate by 0.25% to 1.0%.  The Bank stated that: "Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook."  Translation:  Rates may stay at 1.0% for some time.

Dallas Fed: The Real Federal Funds Rate Is Negative

-1.59% in August 2010.  In finance, the real interest rate is equal to the nominal interest rate minus inflation.  According to the Dallas Fed, the real federal funds rate has been in negative territory since early 2008, when it was lowered to 2.0%.  Negative real interest rates are bad for savers and a disincentive for investing in financial instruments.  They can also be viewed as an unhealthy subsidy for borrowing and consumption - in essence, the lender is subsidizing consumption, as they are losing ground to inflation on repayment.   This may be necessary in a slow economy, but it is an unsustainable position in the long term.  Chart below:

 

 

Will the Fed Follow the Bank of Japan's Interest Rate Trap?

The main rate is 0.1%.  The overnight call rate is the main interest rate set by the Bank of Japan, one of the tools it can (could) use to stimulate the economy.  The rate has been below 1.0% since 1996 and Japan has been trapped in a deflationary environment with slow (or no, or negative) GDP growth since the early 1990's.  Some economists speculate that the US may be headed down the same path.  Left, chart of the call rate; below, call rate versus bank lending.

Bank of England Holds Main Rate Steady

The bank rate is a record low 0.5%.  This indicates that continued weakness is expected in the economy and reports are that there will be no rate hike in the near future.  Meanwhile, inflation is now at 3.2% (left) and continues to stay well above the Bank of England's target of 2%.  Part of the cause of this are higher gas prices and the increase in VAT (from last year’s temporary rate of 15% to 17.5%).  The bank rate has now been cut nine tims from its previous high of 5.75% in July of 2007.  Chart from National Statistics.

Reserve Bank of Australia Holds Main Rate Steady

Australia's inflation target is 2-3%. The Reserve Bank sets the target 'cash rate,' the market interest rate on overnight funds as the main tool for monetary policy.  The most recent rate decision was August 3, and the cash rate was left at 4.5%.  The Reserve Bank's logic:

"...Commodity prices are off their peaks but those most important for Australia remain at very high levels, and the terms of trade are around their peak of two years ago...With the high level of the terms of trade expected to add to incomes and demand, output growth in Australia over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Consumption spending is recording a modest increase at present...with underlying inflation declining to about 2¾%, the lowest rate for about three years...Through to mid 2011, underlying inflation is likely to be in the top half of the target zone (2-3%), while CPI inflation will probably be just above 3% for a few quarters due to the impact of the tax changes and increases in utilities prices."  Translation:  there may be further rate increase in the near future.

Will Bank of Canada Raise Rates on June 1?

Most expect a 0.25% increase.  The Bank of Canada is responsible for the country's monetary policy and has 2.0% inflation target.  Its primary inflation tool is the "overnight rate," or key interest rate, which has been at a record low of 0.25% since April 2009.  Over the last few months, inflation has been between 1.9% and 2.1%.  But now, the OECD estimates that Canada's inflation could be between 3.2% and 3.6% later this year, and reports that: "The Canadian economy is rebounding “vigorously” from the recession, lifted by a recovery in trade and fiscal and monetary policy measures..."  OECD therefore suggests (as reported in the Globe and Mail) that Canada raise rates without delay.  The Canadian dollar is trading at $0.94033, but with a rate hike, it will move closer to parity. 

 

Reserve Bank of Australia Raises Rates Again

To 4.25%, the fifth increase in six months.  According to the official Reserve Bank statement: "With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker...The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process."  More to come?  Below, recent rate history:

The Fed's "Extended Period"

It promises to keep interest rates low that long as it "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate..."  At its March 16 meeting, the Fed's Open Markets Committee (FOMC) left rates unchanged at their current low of 0-0.25%.  They have been at this level since December 2008.  Per The Guardian, the Fed is waiting for "clear evidence of an upturn in the US economy" before raising rates.  The last time the federal funds rate was this low was summer 1954; you can see a complete history of the rate here at the St. Louis Fed.

 
  

Reserve Bank of Australia Raises Key Rate

First central bank raise in 2010.  The Reserve Bank of Australia raised its cash rate today by 0.25% to 4.0%.  The bank's inflation target is 2-3%.  It began easing during this recession in the third quarter 2008 (see chart, left), dropping rates from 7.25% to 3.0% by April 2009.  This was followed by (now) four 0.25% rate hikes, starting in October 2009.  Although prices in Australia were up only 1.9% in January, year over year, the bank believes inflation could rise to 3.0% in 2010 (per Bloomberg), and it made a preemptive increase.  This was the first raise by a major central bank in 2010.  Economists project the bank could raise the cash rate to 4.5% this year (WSJ).