Source: Forex News
Central banks are at the core of the financial world. Their decisions have helped save countries from financial disasters. At times, their actions have also caused financial challenges to countries.
The history of central banks goes back to the 17th century when the first Central Bank was formed in Sweden. The Riksbank was formed in 1668. A hundred years later, the Bank of England was formed to purchase government bonds. Three hundred years later, the Federal Reserve was formed.
Today, most countries have a central bank which is given several functions. First, they are given the mandate for protecting the residents from increased inflation. Second, they are tasked with developing policies to facilitate the health of the financial sector.
In finance and economics, the concept of inflation is very important. This is because, increased inflation makes basic things like food and housing unaffordable. On the other hand, decreased inflation – also known as deflation – where products’ price is not growing is not desirable. This is because it will not be ideal for companies producing the goods. As such, central banks have the duty to balance between inflation and deflation. Today, the ideal point has been established as 2% by main central banks.
There are several causes of inflation. For example, when the unemployment rate is declining, and wages are growing, the expectation is that the price of products will go high, boosted by higher demand.
One of the most effective tool to control inflation is interest rates. A low interest rates gives people and businesses the ability to borrow affordably. This tends to boost inflation. Therefore, when inflation jumps, central banks tend to hike interest rates to limit the spending. To measure the rate of inflation, one of the most popular measures is the Consumer Price Index (CPI). It shows the variation of prices of the common consumer products. They also look at the Producer Price Index (PPI) which measures the average change over time in the selling prices received by domestic producers for their output.
Yesterday, we received the Consumer Price Index for the United Kingdom. The data showed that the monthly inflation in the country eased to an annualized rate of 2.5%. This was the lowest CPI growth in one year. It seemed to indicate that the BOE will not be under pressure to increase rates in the next meetings.
Last week, the US released the CPI data that disappointed and reduced the chances that the Fed will have three more increases this year. Just a month ago, the new Fed Chair indicated that that there was a probability that they would hike four times. The chart below shows the five year trend in the US CPI.
Today, we received inflation data from New Zealand that was in line with the analysts’ forecasts. The data from the country’s bureau of statistics showed that in the first quarter, inflation rose by 0.5% and at a reduced annualized rate of 1.6%.