Interest Rate Views: February 2012 - OCBC Wealth Management

Most central banks still to adopt an easy monetary policy

2 February 2012

Major central banks in the world remain dovish due to concerns that global growth may deteriorate.

The ECB left rates unchanged after its first meeting in 2012, as the central bank focused on providing liquidity to banks in the Euro-zone, rather than cutting rates after the two rate cuts in 2011. 1Q2012 should see the central bank continuing to providing support to banks by way of liquidity instead of cutting rates, given fears that inflation may revisit the region.

Down under, investors will keep a close eye on the Reserve Bank of Australia (RBA) after it cut rates towards the end of 2011. The RBA could cut rates further, given the uncertainties in Europe. A rate cut can be expected as early as February, when the RBA meets again.

In China, with the economy cooling and the inflation rate coming off, the central bank is likely to ease monetary policy further by cutting the reserve requirement ratio (RRR) of banks. Already, the total outstanding foreign exchange purchased by financial institutions has declined for three consecutive months in 4Q2011, an indication of capital outflows. The prospects for less capital inflows into China this year should give the PBOC room to lower its RRR further.

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