Central Bank Monitor: Last Week’s BOJ, RBNZ, BOE and ECB Reports

Central bank activity last week had the world's central banks taking a break from any major rate decisions with the only activity being four major central banks releasing reports of varying impact.
The central bank reports out last week included:

• The Bank of Japan's Monthly Report on Monday,
• The RBNZ's Financial Stability Report on Tuesday,
• The Bank of England's monthly Inflation Report on Wednesday and
• The ECB's Monthly Bulletin on Thursday.

BOJ's Monthly Report

The Japanese central bank's Monthly Report indicated that the BOJ will continue leaving rates at the record low levels of 0.0% to 0.10%. While the report states that exports will continue flat for the time being, they are expected to increase "moderately again".
The report addresses credit demand specifically and noted that Japanese companies,
"need to fund working capital and fixed investment has declined, and some firms have reduced the on-hand liquidity that they had accumulated. Against this backdrop, bank lending has declined on a year-on-year basis. The amount outstanding of corporate bonds has exceeded the previous year's level, while that of CP has declined. In these circumstances, the financial positions of firms have continued to show signs of improvement as a whole".
The report also noted the increase in the value of the Yen versus the U.S. Dollar, which continues to adversely affect Japanese exports. Nevertheless, the report was fairly optimistic, stating that,
"Japan's economy is likely to grow at a slower pace for some time, but is expected to return to a moderate recovery path thereafter."
Perhaps in response, the Japanese Yen staged a possible reversal last week, losing -1.3% against the U.S. Dollar. An increase in risk aversion also contributed to this Dollar strength.

The RBNZ's Financial Stability Report

The RBNZ issued its Financial Stability Report on Tuesday where, among other items, the observance of the Basel III agreement on bank capital reforms will be implemented by the RBNZ. This will include new standards and a strengthening of definitions for regulatory capital, as well as the introduction of new buffers to help banks withstand economic and financial stress.
In addition to the Basel III measures, the RBNZ will also create the Financial Markets Authority or FMA, which was introduced in a bill to the New Zealand House of Parliament on September 14^th, 2010.
The bill creating the FMA sets out the objectives and functions of the new regulating agency which will replace the Securities Commission and adopt some of the functions of the Ministry of Economic Development which will include the functions of the Government Actuary.
The FMA will be chiefly responsible for the regulation of securities including those issued by companies regulated by the RBNZ. The central bank will maintain close contact with the FMA and will exchange information about emerging risks in the financial markets.
In the report's closing comment, RBNZ Governor Allan Bollard stated that,
"Non-performing loans and profitability have stabilized over recent months, as reflected by an unchanged rating for 'capital and profitability'. There have been ongoing improvements in the funding position of the New Zealand banking system, as indicated by material improvements in the core funding ratio. Nevertheless, funding markets remain somewhat fragile, as indicated by the 'funding and liquidity' dimension still sitting slightly above normal."

BOE's Inflation Report Calls U.K. Economic Growth "Highly Uncertain"

The Bank of England's Inflation Report for November gave a fairly optimistic assessment for the economy of the United Kingdom. Nevertheless, the conclusions of the central bank's report were highly qualified and warned that,
"growth may slow in the short term" and that the "outlook for growth is highly uncertain".
The report also notes that U.K. GDP growth was down considerably in the third quarter of 2010, although the central bank expects the recovery to be ongoing in the fourth quarter. Nevertheless, the BOE warned that,
"the strength of the recovery is likely to be tempered by the fiscal consolidation and the reduced availability of credit."
As far as inflation is concerned, the outlook for inflation in the U.K. poses "substantial risks" due to prolonged unemployment or "spare capacity", as it is referred to in the report.
The British central bank also anticipates that the level of inflation could increase considerably after the implementation of the January, 2011 VAT tax increase and the rising prices of commodities and other "traded goods and services".
Furthermore, citing the XpertHR research relating to private sector wage prospects, the BOE stated in their report that,
"The recent elevated rate of inflation could put upward pressure on pay if employees seek compensation for the higher cost of living. According to the 2010 XpertHR Pay Prospects Survey, around 60% of businesses take account of some measure of inflation during pay negotiations. But the survey also suggests that affordability matters, making it less likely that companies will award pay increases that are not linked to improvements in productivity and profitability. Private sector respondents to the survey expect the median pay settlement in 2010/11 to be 2%, the same as their expectation in 2009/10."
The BOE concluded in their report that the recovery in U.K. productivity might be hampered by the slack in the labor market which will tend to keep pay growth "relatively subdued".

ECB's Monthly Report: "Appropriate" Monetary Policy

In the wake of serious debt problems suspected for Ireland and other cash strapped European economies, the ECB issued its Monthly Report for November. In its report, the ECB stated that it considers its monetary policy "appropriate" and that it includes the flexibility to handle future situations as they may arise.
The European central bank also expects inflation in the EU to continue growing at a moderate pace, with the inflation rate reaching 1.5% in 2010 and 2011 while rising slightly in 2012 to 1.6%. The 2010 and 2011 numbers were revised upwards by +0.1%, while the 2012 inflation number was revised down by -0.1%.
Growth for the Eurozone was expected to be +1.6% in 2010, upwardly revised by +0.5% from the previous estimate, although next year's anticipated growth rate declined to +1.5% and 2012's growth rate rose to +1.7%.
Furthermore, the ECB forecasts that unemployment will continue to be above 10.1% through 2010, with the level dropping to 10% in 2011 and dropping considerably by the end of 2012 to 9.6%.

Next Week's Central Bank Activity

Next week's central bank activity is very light, with no major rate decisions being made by the major central banks that usually affect the forex market. Nevertheless, some meeting minutes will be released that could spark some interest.
The week begins with the RBA's Monetary Policy Meeting Minutes on Monday, followed by the BOE Inflation Letter tentatively scheduled for release on Tuesday.
On Wednesday, the BOE's Monetary Policy Committee Meeting Minutes will be released and the Bank of Canada's Review is due out on Thursday.