New Loose Monetary Policy to Start, A Long Way for Economy Recovery

SHANGHAI, Aug. 31 (SMM) -- Uncertainties on global economic recovery have become market focus recently, and concerns over possible double-dip recession haunted in the market. With the Federal Reserve's annual meeting coming to an end, central banks in various countries told that new monetary policies will be adopted to stimulate economy, and there is a long way for economy recovery.

Fed Maintains Loose Monetary Policy

The US Federal Reserve Chairman Ben Bernanke stated at the Federal Reserve annual meeting on August 27th that the US economy is expected to continue growing in 2H 2010, but the growth pace may slow down. Current high unemployment rate is regarded as a major issue for monetary policy making.  He believed that the US economic development has conditions to speed up, but the Fed will lend support to economic development when it is necessary. He also added that Federal Open Market Committee (FOMC) is prepared to spare no efforts to make sure a sustainable economic development. The latest economic data shows US economic condition is worrisome in recent months. The US industrial output slipped, and was lower than previous estimation from FOMC in early 2010. Consumer expenditure may continue growing at a relatively slow pace in the short term, but the US home sales plunged to a new 15-year low. In addition, the unemployment rate remained almost unchanged at approximately 10% for a year, and some radical market participants believe that a double-dip recession has been under way. As to current measures, SMM believes that FOMC will maintain interest rate at an extremely low level for a longer time. Previously, the US Federal Reserve has already increased purchases of treasury bills, and the Federal Reserve may enhance the implementation of monetary policy if the US economy deteriorates.

Bank of Japan Increases Money Supply

Bank of Japan held a meeting to discuss interest rate on August 30, and made a consensus to maintain interest rate unchanged at current level. In addition, a new loose monetary policy has been passed with broad support. According to the new policy, Bank of Japan will maintain its loans of JPY 20 trillion with 3-month fixed interest rate of 0.1%, and will increase loans by JPY 10 trillion based on 6-month fixed interest rate loans. Masaaki Shirakawa, President of Bank of Japan, stated later at a new conference that appropriate measures will be adopted when necessary, and may downgrade expectation on economy outlook. The yen strengthened rapidly versus the US dollar in response to disappointing Japan's monetary policy, which in turn pushed up the US dollar index to stand above the key 83 level.

European Central Bank May Extend Money Expansion Policy 

It is reported from global central banks' annual meeting, Trichet is likely to make an announcement at European Central Bank Management Committee meeting to be held on September 2, and pledge to keep liquidity ample at least by early 2011. Webber, committee member of European Central Bank Management Committee, stated on August 20 that the European Central Bank should extend the unlimited liquidity policy until the end of 2010, and begin to discuss the withdrawal of this policy again in early 2011. Previously released report from Bank of England showed that the pace of economic expansion in the UK may be lower than previous estimation, and industrial output in the UK may recover to pre-crisis level until late 2011, and the government's commitment to tighten fiscal policy made at the budget report in June may be delayed.

Risk Aversion May Grow Further in Financial Markets 

Based on the above statements from central banks at major economies, SMM believes that major western economies have reached a consensus to maintain current quantitative loose monetary policy unchanged and will launch new bailout schemes when necessary. It will be a long term before central banks in the US, UK, Europe, and Japan to increase interest rates. In view of the cautious attitude toward economic growth adopted by central banks at major economies and concerns over economic development, risk aversion sentiment may grow further in financial markets. In this context, market players may choose to hold the US dollar but sell off equity, commodities and other risky assets. As a result, fluctuations in base metal prices will intensify in the future.

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