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Zhou Xiaochuan Expects Prudent Monetary Policy with Loosening Bias…..

In case you’re wondering who Mr Xiaochuan is, he is the Governor of the People’s Bank of China. His opinion is currently as important as that of Mario Draghi of the European Central Bank, or Janet Yellen of the Federal Reserve Bank. While the impact of weakness in China was not enough to deter the Fed from acting on December 16, 2015 we now see the effects manifesting in equities markets around the world, and the concomitant decline of emerging market economies and their currencies. As a result, the Fed is hesitant to hike interest rates on Wednesday, March 16 for fear of the repercussions on the global economy. Consequently, the likelihood of a rate hike in the US beyond the current 0.50% interest rate is approximately 0% for March according to statisticians at The CME Group FedWatch probabilities for the next year are as follows:

  • April 27, 2016 probability at 20%
  • June 15, 2016 probability at 43%
  • July 27, 2016 probability at 50%
  • September 21, 2016 probability at 61%
  • November 2, 2016 probability at 65%
  • December 21, 2016 probability at 75%
  • February 1, 2017 probability at 76%
  • The fact that probabilities of rate hikes at future points are increasing is an important point. It shows that the expectation of an improvement in the global economy improves as time passes. This is a result of long-term bulls vis-a-vis oil price rises, iron ore price rises, a strengthening of the Chinese economy, the Japanese economy and the European economy. The US economy is expected to perform according to Fed forecasts, with an inflation rate in the range of 2% by the year’s end and unemployment remaining at current low levels of 4.9%. The China factor is an important one to consider as well since Chinese central bank policy impacts upon sentiment in the world’s second-largest economy. While the Chinese currency – the CNY – is fixed by the authorities in Beijing, it is possible that central bank policy will have an effect on the buying power of the CNY. The People’s Bank of China will be pumping $48 billion into the Chinese economy to help spur economic growth towards the 6.5% – 7% GDP rate for 2016. For 2015, China’s GDP had inched below the critical 7% growth rate per annum for the first time in 25 years when it recorded a growth rate of 6.9%.


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