U.S. Federal Reserve, Bank of England at different interest rate crossroads

OTTAWA – Two of the world’s most powerful central banks will probably end up at odds this week.

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The U.S. Fed is expected on Wednesday to keep its current interest rate level, while focusing on gradually tightening borrowing costs as the economy improves – even though the next hike may still be some methods off.

The Bank of England, meanwhile, is taking into consideration the threat of the “Leave” victory in June’s referendum on a U.K. break in the Eu – an issue that may prompt policymakers to preemptively cut their key lending rate on Thursday, or wait until following the “Brexit” vote.

As for the Bank of Japan, policymakers in the world’s third biggest economy left their main interest level as-is on Tuesday.

The U.S. Fed, led by chairwoman Janet Yellen, is still following its so-called “dot plot” – a chart of 17 policymakers’ predictions in the last 4 years of where their benchmark rate is headed.

The central bank’s rates are now between a range of 0.25 to 0.5 percent, where it’s been since December.

Since then, “the data has been mixed to positive, but nothing would suggest that they should completely place a break on monetary policy,” said Charles St-Arnaud, an economist at Nomura Global Research working in london.

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And at the moment, Yellen and her Fed colleagues are not in a rush to regulate lending levels.

“The core message will still be the same: expansion is still happening,” said St-Arnaud, who was previously based in Ny. “There has still been some volatility plus some risks, but the basic message is still the same.”

Michael Gregory, deputy chief economist and head of U.S. economics at BMO Capital Markets, said he’ll be watching for “two big things” on Wednesday.

“I do think they’ll state that the risks continue to be nearly balanced,” he said. But rather than projecting four rate increases this season, “I think what we might find is really a shift down to only three for this year, and perhaps still four for the coming year.”

The Fed has discussed an eventual steady rate of interest of approximately 3.5 per cent, he said. “I suspect that is going to fall too, to around 3.25 per cent.”

The U.S. decision will come eventually prior to the Bank of England announces it’s latest rate decision.

Peter Dixon, an economist at Commerzbank AG working in london, said “a prefer Brexit might change the landscape and tip the total amount in favour of easing, however this is something we will simply be in a position to evaluate properly following the referendum.”

“So long as growth holds up and inflation doesn’t go into reverse, I would expect the (Monetary Policy Committee) to stand pat,” he told Bloomberg News. The financial institution of England continues to be in a record low 0.5 per cent for nearly seven years.

St-Arnaud, working in london, agrees that there won’t be any rate decision on their side until after the Brexit vote.

“Until then, we’ll remain on hold. They (BOE governor Mark Carney and his policymakers) probably wouldn’t want to rock the boat,” St-Arnaud said.

“We’ll probably have some discussion about ‘maybe rate hikes are needed.’ They might have a dissenter or two. But overall, I do not think they’d want to signal too much through monetary policy before the Brexit vote.”

Meanwhile on Tuesday, the Bank of Japan kept its reserves deposit rate at negative 0.1 percent – as was widely expected. The BOJ caught world markets unawares in January if this made the move to negative rates.

“They’re not in a rush to do more,” St-Arnaud said. “They continues to evaluate the impact of negative rates around the economy before they make another decision.”

gisfeld@nationalpost.com

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