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					International Economic Perspective
31 July 2009


Will the BoE cause a stir?
Nicola Chadwick – Economist – +44 (0)20 7710 3918 – nicola.chadwick@cba.com.au

    Both the ECB and BoE will leave rates unchanged when they meet next week.
    The BoE could signal its intention to use the extra £25bn in QE funds, thereby utilizing the total £150bn.
    We wouldn’t rule out the BoE asking the Chancellor to approve more, but believe the odds have fallen.

The BoE and           When the Bank of England and European                  %                                                                 %
ECB maintained        Central Bank met on rates last month, neither                            BOE BANK RATE
                                                                             8                                                                     8
their policy          bank provided much in the way of stimulation
stances last          for markets, with both opting to leave their
month.                policy settings unchanged. The ECB left its key
                      policy rate at 1.0% and made no change to its          6                                                                     6
                      intended covered bond purchases totalling 60bn
                      euro.    Mr Trichet‟s press conference was
                      uninspiring, with no notable adjustments to the        4                                                                     4
                      ECB‟s view on the economic outlook from June.
                      The Bank of England meanwhile maintained the
                      Bank Rate at 0.5% and made no adjustment to
                      its Asset Purchase Facility (APF), which is            2                                                                     2
                      valued at £125bn under its current mandate
                      (with just over £121bn in purchases having
                      taken place to July 23).                               0                                                                     0

                      Next week‟s monetary policy announcements              Jan-00        Jan-02     Jan-04     Jan-06     Jan-08
                      by both central banks could well side step the
Rates will be left    history books once again.              Both will
unchanged next
                                                                             %pa            UK MANUFACTURING                                Index
                      undoubtedly leave their policy rates unchanged.         8                                                                 64
month, but the        And the ECB (which, on a relative basis, hasn‟t                           Manufacturing production, %pa
BoE could adjust      done much to dispel its reputation for being
its APF.              conservative lately) is unlikely to adjust its
                      intended asset purchases at this early stage of
                      the game (only 3.7bn euros worth of the                    0                                                             51
                      intended 60bn in purchases have taken place).
                      There is however some chance of a shake up
                      from the BoE, which could well adjust the scale
                      of its APF against the backdrop of a fresh set of          -8                                                            38
                      economic forecasts, to be revealed in the
                      Bank‟s Inflation Report the following week.                                        Manufacturing PMI (rhs)

                      From the outset, see still favour the Monetary
We favour the         Policy Committee opting to pull the additional         -16                                                               25
BoE utilising the     £25 billion in quantitative easing funds available          Jan-92     Jan-96     Jan-00     Jan-04          Jan-08
                      to it into play, thereby utilising the entire £150bn
additional £25bn
                      allocation. It‟s certainly not a one-way bet, but
but question                                                                          UK HOUSE PRICES & RETAIL
                      given a likely still benign inflation outlook
whether it will ask                                                          %pa                                                            Index
                      encompassed in their fresh forecasts and the           12                                                               120
the Chancellor to     relatively small amount relative to the
approve more.         purchases that have already taken place, we                             Retail Sales 3m/yoy (lhs)
                      believe it‟s a question of “why not?.                   8                                                               65
                      The key question, however, is whether the Bank
                      of England will ask the Chancellor to approve
                      more funds. We certainly wouldn‟t rule it out,          4                                                               10
                      but believe the odds have fallen. While some
                      would argue there is no harm in having more
                      funds approved and sitting on the sidelines in
                                                                              0                                                              -45
                      case it is required, it would send a signal to
                      markets and the public that it believes more                                    RICS House Prices , Adv
                      needs to be done. While we continue to believe                                       4 mths (rhs)
                      that further policy action would help the UK           -4                                                               -100
                      economy on what will be a long and unstable                Jan-87      Jan-93       Jan-99          Jan-05
                      road to recovery, recent rhetoric from the bank


                                                                                                                                        8
International Economic Perspective
31 July 2009

                     has suggested they are disinclined to deliver
                     more stimulus. The magnitude and range of             % UK     UNEMPLOYMENT & EARNINGS
                                                                                                                               %
                     policy measures already delivered is huge, and        8                                                       8
                     policy settings are unprecedentedly stimulatory.
                     Throughout the crisis we‟ve been advocates of                       ILO unemployment rate
                     unprecedented times justifying unprecedented
                                                                           6                                                       6
                     measures, but now the increasingly convincing
                     green shoots in the data, alongside escalating
                     market concerns over the inflationary impact of
                     more stimulus, will likely carry a lot of weight in   4                                                       4
                     deterring the Bank of England from delivering
                     more.                                                                             Average earnigs
                                                                                                        Excl bonuses
                                                                           2                                                       2
                     While additional stimulus is looking less likely
                     given recent green shoots and rising market
                     inflation worries, we continue to believe that the
Even if additional   stimulus in play will remain for some time. Even      0                                                       0
stimulus is not      in spite of a drop in the estimate for potential      Jan-00    Jan-02   Jan-04     Jan-06   Jan-08
delivered beyond     GDP growth in the 2009-2010 period to 1.3%
the £150bn asset     from 2.2% in 2006-2008, the OECD still
                     estimates the UK output gap will stand at -6.4%              BOE INFLATION FORECASTS
purchases, policy                                                                      (May Inflation Report)
stimulus will be     of GDP in 2010, above the OECD total of -
retained for a       5.7%. There is a good chance that we see a
                     growth spurt heading into 2010, given the
prolonged period
                     extent to which production and spending have
of time.
                     fallen. But we believe growth increases will
                     ease off thereafter, on back of medium term
                     damage to investment prospects, increased
                     savings and reduced credit availability. We
                     continue to believe that the UK recovery will be
                     tepid and prolonged relative to past recoveries.
                     In this sort of environment the BoE will have
                     little to worry about on the inflation front for
                     some time; indeed its projections in its August
                     Inflation Report are likely to once again show
                     CPI inflation undershooting its 2% inflation
                     target at its medium term horizon. We don‟t
                     look for the BoE to start to tighten policy until
                     the second half of next year.




                                                                                                                           9
The Week Ahead
31 July 2009


Calendar – Australasia, Japan and China
             Time                                                                     Forecast
Date         AEST Econ Event                          Period    Unit    Last    Market      CBA
Mon 3 Aug    09.30   AU AiGroup PMI                     Jul     Index   38.4      ~          ~
             11.30   AU Job advertisements              Jul     m%ch    -6.7      ~          ~
             11.30   JN Labour cash earnings           Jun      y%ch    -2.5      ~          ~
             15.30   AU RBA commodity price index       Jul     y%ch    -29.3     ~          ~
Tue 4 Aug     ~      AU CBA/ACCI Business survey       QII      Index   31.7      ~          ~
             08.45   NZ Wages including overtime       QII      q%ch    0.6       ~
             08.45   NZ Wages excluding overtime       QII      q%ch    0.5       ~         0.6
             08.45   NZ Average hourly earnings        QII      q%ch    1.1       ~         0.6
             11.30   AU House prices                   QII      q%ch    -2.2      ~          ~
                                                                y%ch
                                                                        -6.9      ~          ~
             11.30   AU Retail sales                   Jun      m%ch    1.0       ~         0.2
             14.30   AU RBA announce rates             Aug       %      3.00     3.00       3.00
Wed 5 Aug    09.30   AU CBA/AiGroup PSI                 Jul     Index   50.2      ~          ~
             11.30   AU Trade balance                  Jun      A$mln   -556      ~         -0.8
Thur 6 Aug   08.45   NZ Employment change              QII      q%ch    -1.1      ~         -1.3
                                                                y%ch
                                                                         0.8      ~          ~
             08.45   NZ Participation rate             QII       %      68.4      ~         67.6
             08.45   NZ Unemployment rate              QII       %      5.00      ~         5.50
             11.30   AU Employment change               Jul      000    -21.4     ~         -20
             11.30   AU Participation rate              Jul      %      65.3      ~         65.2
             11.30   AU Unemployment rate               Jul      %      5.8       ~         5.9
             15.00   JN Leading index (p)              Jun      Index   76.9      ~          ~
             15.00   JN Coincident index (p)           Jun      Index   87.1      ~          ~
Fri 7 Aug    09.30   AU AiGroup PCI                     Jul     Index   42.6      ~          ~
             11.30   AU RBA Quarterly Statement on Monetary Policy
Sat 9 Aug     ~      NZ QV house prices                 Jul     y%ch    -7.1      ~          ~




                                                                                                   10
The Week Ahead
31 July 2009


Calendar – North America & Europe
Please note all days and times are UK time, not local release day/times
               UK                                                                        Forecast
Date          time Econ Event                            Period    Unit    Last    Market      CBA
Mon 3 Aug     08.55   GE PMI manufacturing (f)            Jul      Index   45.2      ~          ~
              09.00   EC PMI manufacturing (f)            Jul      Index    46       ~          ~
              09.30   UK PMI manufacturing                Jul      Index    47       ~          ~
              15.00   US ISM manufacturing                Jul      Index   44.8     46.5        ~
              15.00   US ISM prices paid                  Jul      Index    50      50.5        ~
              15.00   US Construction spending            Jun      m%ch    -0.9     -0.6        ~
Tue 4 Aug     09.30   UK PMI construction                 Jul      Index   44.5      ~          ~
              10.00   EC PPI                              Jun       ~       ~        ~          ~
              13.30   US Personal income                  Jun      m%ch    1.4      -1.0        ~
              13.30   US Personal spending                Jun      m%ch    0.3      0.2         ~
              13.30   US Core PCE                         Jun      m%ch    0.1      0.2         ~
                                                                   y%ch
                                                                           1.8      1.7         ~
              15.00   US Pending home sales               Jun      m%ch    0.1      0.3         ~
Wed 5 Aug     08.55   GE PMI Services (f)                 Jul      Index   48.4      ~          ~
              09.00   EC PMI composite (f)                Jul      Index   46.8      ~          ~
              09.30   UK PMI services                     Jul      Index   51.6      ~          ~
              09.30   UK Industrial production            Jun      m%ch     -0.6     ~          ~
                                                                   y%ch
                                                                           -11.9     ~          ~
              10.00   EC Retail sales                     Jun      m%ch    -0.4      ~          ~
                                                                   y%ch
                                                                           -3.3      ~          ~
              13.15   US ADP employment                   Jul       000    -473     -330        ~
              15.00   US ISM non-manufacturing            Jul      Index    47      48          ~
              15.00   US Factory orders                   Jun      m%ch    1.2      0.5         ~
Thu 6 Aug     00.01   UK NIESR GDP estimate               Jul       %      -0.4      ~          ~
              12.00   UK BoE announce rates               Aug       %      0.5      0.5        0.5
              12.45   EC ECB announce rates               Aug       %      1.0      1.0        1.0
              13.30   CA Building permits                 Jun      m%ch    14.8     1.0         ~
              13.30   US Initial and continuing claims
Fri 7 Aug     07.00   GE Trade balance                    Jun      €bln    9.6       ~          ~
              07.00   GE Current account                  Jun      €bln    3.7       ~          ~
              07.00   GE Industrial production            Jun      m%ch    3.7       ~          ~
              09.30   UK PPI                              Jul       ~       ~        ~          ~
              12.00   CA Change in Employment             Jul       000    -7.4     -20         ~
              12.00   CA Unemployment rate                Jul       %      8.6       ~          ~
              13.30   US Non-farm payrolls                Jul       000    -467     -325        ~
              13.30   US Unemployment rate                Jul       %      9.5      9.6         ~
              15.00   CA Ivey PMI                         Jul      Index   58.2      ~          ~
              20.00   US Consumer credit                  Jun      $bln    -3.2     -4.2        ~


                                                                                                     11
The Week Ahead
31 July 2009


Calendar – Key Events To Watch
Sara Hoenig – Economist – 612 9118 1107 – sara.hoenig@cba.com.au
Chris Tennent-Brown – NZ Economist - 649 374 8819 – chris.tennent-brown@asb.co.nz

Australia and New Zealand
Tuesday 4 August                                                  %                                                           %
                                                                        NZ WAGE ANNUAL GROWTH
NZ Wages, QII                                                     6                                                           5
Private sector wages (excl. overtime), q%ch, (f) 0.6                   LCI -Wage Rate P er Jo b
                                                                                (rhs)
QES wages, q%ch, (f) 0.6                                                                                                      4
                                                                            Source: Stats NZ
The balance of the labour market has swung sharply
                                                                  4
over the past year in response to the ongoing recession.                                                                      3
Hiring has dropped off and unemployment has started to
rise more noticeably. These influences are now starting
                                                                                                                              2
to show through in moderating wage growth after a
                                                                  2
sustained period of skill shortages and strong wage
growth. We expect the closer-watched LCI (private                                   QES - Wage Rate P er Emplo yee            1
sector, ordinary time) to register a 0.6% increase in QII,                                      (lhs)
pulling the annual rate down to 3.2%. We expect the
                                                                  0                                                           0
equivalent measure in the more volatile Quarterly                 M ar-93 M ar-96    M ar-99 M ar-02     M ar-05    M ar-08
Employment Survey to also register a 0.6% increase in
the quarter, which would drop the annual rate sharply
down to 3.7%. Anecdotally, wage freezes are becoming
more commonplace, and as these take effect wage
growth is likely to slow more moderately. The QES
survey also contains job-related figures. These may
give some steer as to the strength of employment,
though there has been considerable divergence recently
between the QES job figures and the HLFS measure of
employment.
Tuesday 4 August
                                                                             RETAIL SPENDING
AU Retail sales, Jun, m%ch (f) 0.2                                              (annual % change)
                                                             16
                                                             %                                                           16
                                                                                                                         %
A flurry of economic policy incentives has supported the
Australian retail sales sector over the course of the
economic downturn. Whilst some of the once-off impacts       12                                                          12
                                                                                                        Essential
of stimulus have worn off, the positive influence of lower
interest rates remain. In addition, consumer confidence      8                                                           8
bounced back over the month. In the minutes of their 7
July meeting, the RBA indicated that retailers had
                                                             4                                                           4
indicated sales had remained strong in June. Over the
June quarter, we expect retail sales volumes were up
1.0% and should contribute 0.25ppts to the QII GDP           0                                                           0
result.                                                                                           Discretionary
                                                             -4                                                          -4
                                                              Jan-03           Jan-05          Jan-07        Jan-09




                                                                                                                                  12
The Week Ahead
31 July 2009

Tuesday 4 August                                                                RBA CASH RATE
AU RBA cash rate, %, (f) no change at 3.00%                     %                                                            %
                                                                8                                                            8
The RBA has begun to prepare markets for the end of
the easing cycle. Their statements and verbal
commentary have turned more optimistic over recent
months, highlighting the surprising resilience of the
                                                                6                                                            6
Australian economy. We expect the August statement
will follow suit, but may keep the option for further rate
cuts down the track in their commentary. Given we
expect no change in the RBA‟s monetary policy settings
                                                                4                                                            4
at this meeting, the market may chose to pay more
attention to the quarterly Statement on Monetary Policy
which will be released on Friday.
                                                                2                                                            2
                                                                Jul-92 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10


Wednesday 5 August
                                                                Index
                                                                              CBA - Ai GROUP PSI                        Index
AU CBA/AiGroup PSI, Jul, Index, (prev.) 50.2                    70                                                        70
The CBA Australian PSI crossed the key 50 boom-bust                     Expansion
level in June (to touch 50.2). This result signifies that the
Australian services sector expanded for the first month         60                                                       60
since March 2008. The July instalment of their PSI will
give markets further information on the services sector
recovery currently underway.                                    50                                                       50




                                                                40                                                       40



                                                                         Contraction
                                                                30                                                       30
                                                                    Jan-03      Jan-05          Jan-07         Jan-09


Wednesday 5 August
                                                                               CLOSING THE GAP
AU Trade balance, Jun, A$mln, (f) -0.8                           $b                                                      $b
                                                                32                                                       32
The Australian trade balance has slipped into deficit as
the strong support of high commodities prices dribbles          28                                                       28
away. As occurred when higher commodities contract
prices came into effect, the lower contract prices will         24                                                       24
continue to drip feed the data and we are likely to see                                                  Imports
further downward revisions to the trade balance. The            20                                                       20
imports side of the ledger is showing a slower pace of
imports declines as consumer and business confidence            16                                                       16
improves. We expect the Australian trade balance will                                                       Exports
have eased further into deficit over the month of June, to      12                                                       12
A$0.8 million.
                                                                    8                                                    8
                                                                    Jan-00   Jan-02    Jan-04     Jan-06      Jan-08




                                                                                                                                 13
The Week Ahead
31 July 2009

Thursday 6 August
                                                               %     EMPLOYMENT & UNEMPLOYMENT                                  %
NZ Household Labour Force Survey, QII                           6                                                               12
 Employment, q%ch, (f) -1.3                                                        A nnual Emplo yment Gro wth
                                                                                              (lhs)
 Unemployment rate, %, (f) 5.5%
                                                                4                                                               9
The HLFS employment figures have only recently
started to reflect the impact of the prolonged recession
NZ has been in since the start of 2008. We expect QII
                                                                2                                                               6
to register a substantial (1.3%) decline in employment,
in keeping with the sharper focus businesses have
brought to downsizing their operations since the
                                                                0                                                               3
financial crisis erupted late last year. As employment
prospects have deteriorated and employment begun                                                       Unemplo yment Rate
                                                                       Source: Stats NZ                      (rhs)
falling, labour participation has started to drop. We
                                                               -2                                                               0
expect a repeat in QII, with the labour participation rate
                                                               M ar-93 M ar-96       M ar-99    M ar-02 M ar-05 M ar-08
falling to 67.6% of the labour force (from 68.4%).
Reduced participation will blunt the impact of fewer jobs
on the unemployment rate, which we expect will
increase to 5.5% (currently 5%).
Thursday 6 August
                                                                                   LABOUR MARKET
AU Labour force, Jul
                                                               %
                                                               6.0                                                          '000
                                                                                                                            120
 Employment change, 000, (f) -20
                                                                               Employment
 Participation rate, %, (f) 5.9                                                  growth
                                                                                  (rhs)
 Unemployment rate, %, (f) 65.2                                5.5                                                          60

The Australian labour market has outperformed
expectations over the course of the economic downturn.
However, the unemployment rate has continued to edge           4.9                                                          0

higher as the participation rate has remained at high
levels but job losses continue. However, the relatively
low levels of job losses indicate that companies are still     4.4                                                          -60
                                                                                                       Unemployment
attempting to retain their staff, conginsant of the                                                      rate (lhs)
difficulties they had recruiting just over a year ago. We
suspect a further 20,000 jobs will have been lost over         3.8                                                          -120

July, dragging the unemployment up to 5.9%, its highest              Jul-07       Mar-08             Nov-08      Jul-09
level since July 2003.
Friday 7 August
                                                                              RBA SMP FORECASTS
AU RBA Statement on Monetary Policy                             %                 (real GDP, % change)                          %
                                                                4                                                               4
The RBA‟s quarterly Statement on Monetary Policy is
the RBA‟s opportunity to give a more detailed discussion                             RBA Forecasts

on their expectations for the Australian economy going
forward. In particular, the quarterly report is their chance    2                                                               2
                                                                                            CBA
to update their economic forecasts. This section of the                                   Forecast
report will be closely watched by markets for any shift in
the RBA‟s outlook. The RBA‟s tone in their statements                                                    Post QI GDP

and minutes has become noticeably more optimistic and           0                                                               0

a lift in their GDP forecasts (at least) should be
                                                                                                     RBA's May SMP
delivered, particularly since the QI GDP report surprised                                               Forecast
to the upside. A lift in CPI forecasts could also occur.                Actuals
                                                                -2                                                              -2
                                                                    Jun-2008      Jun-2009      Jun-2010      Jun-2011




                                                                                                                                     14
The Week Ahead
31 July 2009

International

Nicola Chadwick – Economist – +44 (0)20 7710 3918 – nicola.chadwick@cba.com.au

Monday 3 August
                                                                          USA: MANUFACTURING ISM
                                                                  Index                                              Index
US Manufacturing ISM, Jul, Index (f) 46.5                         80                                                    80
The manufacturing ISM - the best near-term indicator of                   Expansion

US GDP growth – has increased convincingly from its
December trough of 32.9 (the lowest since May 1980) to
44.8 in June. Production surged into positive growth              60                                                   60
territory in May to 52.5, though new orders faltered back
to 49.2 from 51.1. We expect the indicator to edge
higher again in July. The extent to which production
has fallen and the severe negative impact of the                  40                                                   40
inventory correction mean that it won‟t take much to
                                                                           Contraction
achieve a fairly sharp rise in growth in the near-term off
a very low base. The employment index will be
watched ahead of the payrolls report on Friday.                   20                                                   20
                                                                   Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05


Tuesday 4 August
                                                             %         USA: PERSONAL SPENDING                             %
US Personal income, Jun, m%ch (f) -1.0                                            (annual % growth)
                                                             12                                                           12
US Personal spending, Jun, m%ch (f) +0.3
                                                                                                  Nominal
US Core PCE, Jun, m%ch (f) +0.2                               9                                                              9

US personal spending looks set to rise a moderate
0.3% in June, helped by government transfer payments
                                                              6                                                              6
the previous month. US retail sales surprised on the
upside on a headline basis, rising 0.6%, but the details
suggested more tepid growth in volumes, with a great          3                                                              3
deal of upside in nominal retail sales stemming from
higher gasoline prices. Discretionary spending areas                              Real
remain weak.                                                  0                                                              0



                                                             -3                                                              -3
                                                              Jan-91         Jan-95      Jan-99   Jan-03    Jan-07


Wednesday 5 August
                                                             Index
                                                                              USA: NON-MFG ISM                         Index
US Non-manufacturing ISM, Jul, Index (f) 48.0
                                                             80                                                              80
Similarly to the manufacturing survey, the services ISM
                                                                       Expansion
has risen strongly off its December low of 37.4 to 47.0 in
June.     The series hasn‟t all been one-way since
December, however, with more volatility than the
manufacturing ISM around the upward trend, which we          60                                                              60

nevertheless expect it to extend moderately further in
July. The June increases in the new orders and
employment indices reinforce the idea that the index will
push northward in July, suggesting a slower pace of          40                                                              40
contraction in the services sector in the coming months.
                                                                          Contraction



                                                             20                                                              20
                                                               Jul-97              Jul-01         Jul-05         Jul-09




                                                                                                                                  15
The Week Ahead
31 July 2009

Thursday 6 August
                                                             %        ECB KEY INTEREST RATE                       %
ECB rate decision, (f) no change at 1%                       6
Ever amongst the more hawkish of the central banks,
recent rhetoric from the ECB suggests members are            5
becoming more worried about their eventual exit
strategy than a period of entrenched deflation. With
                                                             4
economic growth set to remain weak for some years
ahead and a widening output gap bearing down on
inflation, which is set to remain below the ECB‟s 2%         3
target for a prolonged period, we see little scope for
tightening from the ECB for at least another year down       2
the track. Still, given the ECB's hawkish tendencies, it
seems that the risk of premature tightening that results
                                                             1
in stifling the recovery is more pronounced in the
Eurozone than in other economies. We expect no
change to the ECB‟s intended covered bond purchases          0
totalling 60bn euro in the foreseeable future.               Jan-00       Jan-02    Jan-04     Jan-06    Jan-08


Thursday 6 August
BoE rate decision, (f) no change at 0.5%
The Bank of England has gone as far as it can with rate
cuts and will leave the Bank Rate unchanged at its
stimulatory level of 0.5% next week. We continue to
believe that further policy action would help the UK
economy on what will be a long and unstable road to
recovery. Having reviewed the situation in light of fresh
economic projections (released the following week in
the Bank‟s August Inflation Report), we still see a good
chance that the BoE will pull in the remaining £25 billion
available to it under its Asset Purchase Facility, thereby
utilising the entire £150bn allocation. Beyond that, the
odds that the BoE asks the Chancellor to approve more
funds have reduced markedly, given the unprecedented
amount of stimulus already delivered, alongside green
shoots in the data and increasing market concerns over
inflation.

Friday 7 August
                                                                           USA: LABOUR MARKET
US Non-farm payrolls, Jul, 000 (f) -333                      750
                                                              '000s                                               10
                                                                                                                  %

US Unemployment rate, Jul, % (f) 9.6
                                                                           Monthly change in
US Average hourly earnings, Jul, m%ch (f) +0.1               500           non-farm payrolls                      8
                                                                                 (lhs)
Indicators are lacking but the likes of initial jobless
claims and the employment indices in the manufacturing       250                                                  6
and services ISMs suggest the pace of contraction in
US non-farm payrolls eased in July (after a
disappointing 467k decline in June) and will continue to         0                                                4
do so in the subsequent months. We still expect the
unemployment rate to take out 10% in the coming
months, though the rate of increase should remain more       -250                       Unemployment rate         2
                                                                                             (rhs)
muted than seen from January through to May given
recent large increases in the labour force are unlikely to
continue apace. Continued employment declines and            -500                                                 0
an increasing unemployment rate in the year ahead will           Jan-00    Jan-02   Jan-04     Jan-06   Jan-08
ensure that wages growth remains historically tepid for
some time.




                                                                                                                       16
Monetary Policy
31 July 2009



Monetary Policy Notes

               OFFICIAL INTEREST RATES                                                                        FUNDING COSTS
      %                                                               %                               (yield on 3-month LIBOR minus OIS)
                                                                                              bp                                               bp
                                            NZ                                                                                    USA
      8                                                               8
                                                                                              300                                              300
                   Australia
                                                                                                                                    NZ

      6                                                               6
                                                                                                                      Europe
                                                                                              175                                              175

                                                                                                                            UK
      4                           UK                                  4


                                                Euro                                           50                                              50
                                                                                                                                 Japan
      2                                                               2
                                                       US                                                       Australia
                                   Canada
               Japan
                                                                                              -75                                              -75
      0                                                               0
                                                                                                   Jan-07 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09
      Jan-00    Jan-02   Jan-04        Jan-06     Jan-08


 Country                 Last Move                           Next Meeting and Forecast                                           CBA View

 Australia          25bp cut to 3.00%                           4 August, 2009                                After significant easing we expect
  (RBA)             on 7 April 2009.                                                                          the RBA to deliver a final 25 basis
                                                            Sep „09       Dec „09   Mar „10         Jun „10   point cut to 2.75% late in QIII.
                                                             2.75%         2.75%     2.75%          2.75%

   US               75-100bp cut to                             11-12 August, 2009                            The Fed has cut rates as low they
 (FOMC)             0-0.25% on                                                                                can go and committed to keeping
                    16 December 2008.                       Sep „09       Dec „09   Mar „10         Jun „10   rates exceptionally low for some
                                                                                                              time. Green shoots in the data have
                                                               0-            0-        0-             0-      made an extension of its QE
                                                             0.25%         0.25%     0.25%          0.25%     program less likely.

Eurozone            25bp cut to 1.00%                           6 August, 2009                                The ECB is getting comfortable with
  (ECB)             on 7 May.                                                                                 its current monetary policy stance
                                                            Sep „09       Dec „09   Mar „10         Jun „10   and has moved into wait-and-see
                                                                                                              mode. Additional policy stimulus
                                                            0.75%         0.75%     0.75%          0.75%
                                                                                                              could be delivered in September.
   UK               50bp cut to 0.5% on                         6 August, 2009                                The BoE has cut rates to an
  (MPC)             5 March 2009.                                                                             historical low and is pursuing a
                                                            Sep „09       Dec „09   Mar „10         Jun „10   quantitative easing programme.
                                                             0.50%         0.50%     0.50%          0.50%

   NZ               50bp cut to 2.5% on                         9 September, 2009                             The high NZD is perturbing the
 (RBNZ)             30 April 2009.                                                                            RBNZ. We expect 2 more 25bpt
                                                            Sep „09       Dec „09   Mar „10         Jun „10   cuts to be delivered in September
                                                             2.25%         2.00%     2.00%          2.00%     and October.
 Canada             25bp cut to 0.25%                           10 September, 2009                            The BoC has announced a
  (BoC)             on 21 April 2009.                                                                         quantitative easing framework and a
                                                            Sep „09       Dec „09   Mar „10         Jun „10
                                                                                                              commitment to low rates for an
                                                             0.25%         0.25%     0.25%          0.25%     extended period.
  Japan             20bp cut to 0.1% on                         10-11 August, 2009                            Japanese interest rates are back at
  (BoJ)             19 December 2008.                                                                         zero.     A quantitative easing
                                                            Sep „09       Dec „09   Mar „10         Jun „10   framework is now being employed.
                                                             0.10%         0.10%     0.10%          0.10%




                                                                                                                                                     17
Forecasts
31 July 2009


Forecasts - Economic
                                          Fiscal Years                                                                              Calendar Years

                                            2005/06       2006/07       2007/08       2008/09        2009/10       2010/11             2004          2005           2006          2007             2008      2009          2010
                                              (a)           (a)           (a)           (f)            (f)           (f)                (a)           (a)            (a)           (a)              (a)       (f)           (f)


Economic Activity

      Private final demand                     4.2           4.3           5.7            1.5          -0.1           3.0                5.7           4.3           3.5           6.1              4.1       -0.8           2.0
  Of which: Household spending                 2.6           4.0           3.7            1.2           1.6           3.5                5.9           3.0           3.2           4.3              2.2        1.2           2.6
             Dwelling investment              -4.3           1.9           1.6           -2.2          -0.7          13.2                3.0          -3.5          -2.7           2.7              2.5       -7.7          11.4
             Business investment              16.4           7.6          15.6            5.7          -7.4          -3.2                9.8          16.7           8.2          14.9             13.7       -5.6          -4.5
      Public final demand                      3.8           3.3           4.1            3.6           5.5          -0.4                5.0           4.3           3.5           2.8              5.3        3.2           4.3
     Domestic final demand                     4.1           4.1           5.3            2.0           1.1           2.2                5.6           4.3           3.5           5.3              4.4        0.1           2.5
   Inventories (contrib to GDP)               -0.4           0.1           0.2           -1.3           0.7           0.8               -0.1           0.1          -0.6           0.6             -0.6       -0.6           1.1
               GNE                             3.7           4.1           5.6            0.7           1.8           2.9                5.4           4.4           2.8           5.9              3.8       -0.5           3.6
             Exports                           2.2           3.8           4.1            2.5          -0.3           9.5                4.3           2.3           3.3           3.3              3.9        0.5           4.8
             Imports                           7.2           9.2          12.9           -2.5           3.1          10.0               15.0           8.9           7.2          11.4             10.3       -8.6          13.1
   Net exports (contrib to GDP)               -1.0          -1.1          -2.0           1.1           -0.8          -0.4               -1.7          -1.2          -0.8          -1.7             -1.5       2.2           0.0
               GDP                             3.0           3.3           3.7            1.0           0.6           2.7                3.8           2.8           2.8           4.0              2.3        0.3           1.9

         Prices & Wages
               CPI                             3.2           2.9           3.4            3.2           1.9           2.5               2.3            2.7           3.5           2.3             4.4        1.7            2.4
          Underlying CPI                       2.6           2.9           3.8            4.3           3.0           2.4               2.5            2.5           2.9           3.1             4.4        3.7            2.4
             AWOTE                             4.7           3.7           4.9            5.4           4.0           4.2               3.9            5.4           3.4           4.8             4.9        5.1            3.7
               WPI                             4.1           3.9           4.2            4.1           3.7           3.9               3.5            4.1           4.0           4.1             4.2        3.9            3.7
  Real h/hold disposable income                4.8           6.8           1.8            4.1          -1.2           4.6               6.7            4.6           5.7           4.8             3.0        0.2            2.5

Labour Market
        Employment                             2.9           2.9           2.6            1.1          -0.3           1.6               1.9            3.5           2.6           2.8             2.2        0.0            0.6
     Unemployment rate                         5.0           4.5           4.2            4.9           6.9           6.5               5.4            5.0           4.8           4.4             4.2        6.1            6.9

External Accounts
Current Account: $bn                         -53.0          -59.1         -70.8         -30.9          -54.6         -54.9             -52.8         -53.9          -53.3         -67.7            -51.0     -41.3         -56.1
                % of GDP                      -5.5           -5.7          -6.3          -2.6           -4.5          -4.2              -6.1          -5.8           -5.3          -6.2             -4.3      -3.4          -4.5




This advice has been prepared without considering your objectives, financial situation or needs, and before acting on the advice, you should consider its appropriateness to your circumstances.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at th
                                                                                                                                                                                                                                  18
Commonwealth Bank of Australia ABN 48 123 123 124 – AFSL 234945 - nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report. No person should act on the basis of this report without c
Forecasts
31 July 2009


Forecasts - Financial
                                                      Interest Rates                                     Exchange Rates
                                                                                        USD versus
               End Period              Cash   90-day     180-day   3-year     10-year     AUD      JPY        EUR     GBP        NZD
                                       Rate    Bank       Bank     Bond        Bond
                                                Bill       Bill
                Jun-06                 5.75    5.98       6.10         5.79    5.78       0.77   114.0        1.26        1.88   0.62
                Sep-06                 6.00    6.17       6.26         5.76    5.51       0.78   118.5        1.28        1.90   0.65
                Dec-06                 6.25    6.44       6.55         6.11    5.88       0.79   120.0        1.32        1.96   0.69
                Mar-07                 6.25    6.52       6.64         6.21    5.88       0.79   120.0        1.32        1.97   0.72
                Jun-07                 6.25    6.44       6.59         6.45    6.26       0.85   123.2        1.35        2.01   0.77
                Sep-07                 6.50    6.89       6.99         6.44    6.15       0.89   114.8        1.43        2.05   0.76
                Dec-07                 6.75    7.24       7.36         6.89    6.33       0.88   111.7        1.46        1.98   0.77
                Mar-08                 7.25    7.86       7.96         6.13    6.05       0.91    99.7        1.58        1.98   0.79
                Jun-08                 7.25    7.84       7.96         6.70    6.45       0.96   106.2        1.58        1.99   0.76
                Sep-08                 7.00    7.32       7.04         5.09    5.40       0.79   106.1        1.41        1.78   0.67
                Dec-08                 4.25    4.15       3.70         3.07    3.99       0.70    90.7        1.40        1.46   0.58
                Mar-09                 3.25    3.14       3.06         3.40    4.42       0.69    99.0        1.33        1.43   0.56
                Jun-09                 3.00    3.19       3.31         4.56    5.52       0.81    96.4        1.40        1.65   0.65
                Sep-09                 2.75    3.00       3.40         4.25    5.30       0.80    98.0        1.40        1.62   0.65
                Dec-09                 2.75    3.00       3.40         4.20    5.30       0.84   105.0        1.42        1.70   0.70
                Mar-10                 2.75    3.00       3.50         4.35    5.30       0.87   112.0        1.45        1.75   0.73
                            Forecast




                Jun-10                 2.75    3.10       3.75         4.70    5.60       0.89   115.0        1.47        1.80   0.75
                Sep-10                 3.00    3.50       4.15         5.05    5.90       0.90   118.0        1.50        1.85   0.76
                Dec-10                 3.50    4.00       4.55         5.30    6.10       0.90   118.0        1.52        1.87   0.77




                                                                                                                                        19
https://www.research.commbank.com.au                                                           http://www.cbaspectrum.com

GLOBAL MARKETS RESEARCH
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