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Economic Indicators for Australia

Economic Overview

In recent decades, Australia has developed into an internationally competitive, advanced market economy. Although its 2005 GDP of US$642.7bln is relatively small compared to other industrial Western European countries, Australia's per capita GDP of $32,000 is comparable to that of other major Western European economies.

Australia has a service-oriented economy, with about 70 percent of its GDP coming from finance, property and business services. Australia's emphasis on economic reforms, low inflation, and trade with China are other key factors that have led to the economy's increased strength. However, the country has one of the largest trade deficits in the world at US$16.6bln, due in part to drought, weak foreign demand and strong import demand. The country has a national deficit of $509.6bln. The rapid increase in domestic housing prices was a previous concern for the Australian economy, but prices appear to have peaked in 2005, easing speculation that interest rates will skyrocket to prevent a speculative bubble.

Major exports include coal, gold, aluminum, iron ore and wheat. Major imports include machinery and transport equipment, computers and office machines, and telecommunication equipment and parts. Australia's main trade partners are the U.S., China and Japan.

Economic Policy Makers and Tools

The Reserve Bank of Australia (RBA) is responsible for determining and implementing monetary policy. The Reserve Bank Board makes policy decisions to achieve the goals of low and stable inflation, financial system stability, and safety and efficiency of the payments system. The Board meets 11 times per year, on the first Tuesday of each month except January. Economic developments and recommendations are discussed, and interest rate or other economic policy decisions are publicly announced the next day.

The Bank's Domestic Markets Department maintains conditions in the money market to keep the cash rate at or near an operating target set by the Board. The cash rate is the rate charged on overnight loans between financial institutions. It influences other interest rates, and acts as the basis for the economy's interest rate structure. Changes in monetary policy lead to a change in the operating target for the cash rate, which results in changes in the current interest rate structure.

The RBA uses open market operations to influence the cash rate. The goal of the RBA's open market operations is to keep the cash rate close to the target rate by managing the supply of funds available to financial institutions. The Reserve Bank of Australia's open market operations are conducted through repurchase agreements and outright transactions in short-term Commonwealth Government Securities (CGS). When the Reserve Bank purchases CGSs, it pays for them by crediting the exchange settlement (ES) account of the seller (or its bank), which increases the supply of ES funds. The supply of ES funds is decreased when the RBA purchases CGSs. By using short-term instruments to conduct its operations, the Reserve Bank of Australia limits interest rate risk.

The RBA may conduct foreign exchange market operations when the market threatens to become excessively volatile, or when the exchange rate is inconsistent with underlying economic fundamentals. The RBA sets a trade-weighted index (TWI), which is the weighted average value of the Australian dollar in relation to the currencies of the country's major trading partners. This index level is published each day at 9 a.m., noon and 4 p.m. The TWI, along with the cross-rate with the United States dollar (USD), is monitored and the RBA can intervene to stabilize market conditions if it is deemed necessary.

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Economic Indicators for Canada

Economic Overview

Canada has the twelfth largest economy in the world, with a GDP valued at US$1.077trl in 2005. As a prosperous and technologically advanced industrial society, Canada is characterized by its market-oriented economic system, production patterns and affluent living standards. Since the mid-twentieth century, the growth of the manufacturing, mining and service industries have transformed the previously rural economy to one that is industrial and urban. The service sector is very important to the Canadian economy, since nearly 75 percent of the labor force is employed in a service-oriented occupation.

Solid fiscal management has resulted in a long-term budget surplus, which is substantially reducing the $600.76bln national debt, although managing the rising cost of Canada's publicly-funded healthcare system is the subject of many political and fiscal debates.

Canada has a trade surplus of $47.1bln, and a substantial surplus with its main trading partner, the U.S., which imports more than 85 percent of Canada's exports. The 1989 U.S.-Canada Free Trade Agreement (FTA) and the 1994 North American Free Trade Agreement (NAFTA) led to increased trade and economic integration with the U.S. Canada's major exports include motor vehicles and parts, industrial machinery, chemicals, plastics, wood pulp, timber, petroleum and natural gas. With 178.9bln barrels of proved oil reserves, which is the amount of commercially recoverable petroleum from known reservoirs, Canada has the second most in the world, behind Saudi Arabia.

Economic Policy Makers and Tools

The Bank of Canada (BOC) was established in 1934, and has set Canadian monetary policy since 1938. The Bank of Canada maintains the value of the Canadian dollar by ensuring price stability, which is maintained by adhering to an inflation target agreed upon with the country's Department of Finance.

The Bank of Canada carries out monetary policy by influencing short-term interest rates through raising and lowering the target for the overnight rate. The BOC announces any changes to the interest rate at eight scheduled dates per year. The dates tie in with the Bank of Canada's analysis of economic developments and their effect on future inflation.

The BOC is closely involved with Canada's financial markets through its activities in the foreign exchange market, its marketing and management of government securities, and its influence on interest rates via the target for the overnight rate.

The Department of Finance's economic and fiscal policy branch monitors economic developments of major trade partners. The branch prepares monthly fiscal and quarterly economic reports, and plays a major part in determining the federal budget. The department's financial markets division provides policy analysis and advice on governing the Bank of Canada, supplying and circulating currency, and developing capital markets.

In 1994, the BOC began using the overnight rate as its key monetary policy instrument instead of the previously followed bank rate. This shift followed after the BOC introduced a 50-basis-point operating band for the overnight rate, which is the rate at which major participants in the money market borrow and lend overnight funds among themselves. The Bank of Canada uses daily adjustments in the level of settlement balances to set a target level for the overnight rate within the operating band. With the introduction of the 1999 Large Value Transfer System, the target for the overnight rate was defined as the midpoint of the band, or 25 basis points below the bank rate. Because the target affects the interest rates that financial institutions charge each other from day to day, it usually affects other interest rates, including mortgages and consumer loans.

Foreign exchange market intervention is conducted by the BOC by using the government's supply of foreign currencies in the exchange fund account. If the Bank of Canada wants to offset a decline in the value of the Canadian dollar, then it will buy Canadian dollars in foreign exchange markets, exchanging other currencies, most often U.S. dollars. In turn, the increase in demand for Canadian dollars helps support or strengthen its value. To make sure that the BOC's purchases do not create a shortage of Canadian dollars, which could increase interest rates, it neutralizes its purchases by depositing the same amount of Canadian dollars in the financial system. The opposite process can be applied to slow the appreciation of the Canadian dollar.

The BOC releases a number of publications that are read for their impact on the Canadian economy. The quarterly Monetary Policy Report and Update provides a detailed summary of the BOC's policies and strategies, the country's economic environment and the implications these issues have on inflation. The biannual Financial System Review provides a detailed review of developments in the financial system and an analysis of financial policy directions. In addition, the BOC releases key banking and money market statistics each Friday afternoon.

Characteristics and Trends

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Economic Indicators for the European Union

Economic Overview

The EU was developed as an institutional framework to economically and politically unite the nations of Europe. The idea of a union of European nations was originally proposed in the 1950s; however, it wasn't until 1992 when the Treaty of Maastricht was accepted. This treaty laid the framework for the integration of foreign and defense policy, judicial and internal affairs, and the economic and monetary union that integrated a common currency, the euro. The final stage of the European Monetary Union (EMU) and the euro were launched Jan. 1, 1999, and most EU countries have either adopted or are planning full adoption of the euro as a common currency.

Currently, 12 of the 25 EU member countries have joined the EMU, and use the euro as currency. These countries include Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal and Finland. Cyprus, Denmark, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Sweden and the U.K. are members of the EU, but have not adopted the euro.

The internal goals the EU are to lower trade barriers, adopt a common currency and create common living standards among all member countries. The international goals are to strengthen the EU's trade, political and economic positions.

The European Union's overall economy is the second largest, after the U.S., with GDP valued at US$12.18trl, constituting almost 21 percent of the world's total gross product. Although the average per capita income in the EU is $28,100, this varies greatly by country, ranging from $10,000 to $30,000. This income disparity has led to difficulties in the acceptance and implementation of common EU policies, and a few countries have gone against the member treaty to prevent national budget deficits. Other difficulties the EU has faced include opposition to continuing southern and eastern expansion and to the Treaty Establishing a Constitution for Europe (TCE), which, to date, has only been ratified by 13 of the member countries.

The EU has the third largest labor force in the world, which is about a quarter of the size of China's labor force. The economy is highly dependent on service, with 67 percent of the GDP derived from the service sector. As one of the world's most technologically advanced industrial economies, industry contributes about 27 percent to the GDP.

The EU is the largest exporter of goods and services, with $1.318trl in annual exports from member countries to the rest of the word. Machinery, motor vehicles, aircrafts, plastics and pharmaceuticals are the most commonly exported products. The U.S. is the most important trade partner for the EU, importing 24 percent of the European Union's goods and services. The trade deficit of the EU is $84bln. One of the reasons for the formation of the EU was to give the member countries international negotiating power, allowing the EU to exercise significant clout in international trade while attempting to level the bargaining field among other countries.

The EMU has highly developed fixed income, equity and futures markets, making it one of the most appealing investment markets for domestic and international investors.

The role of the euro as a reserve currency is largely based on the EU's role in international trade. Most countries keep large amounts of reserve currencies to reduce exchange risk and transaction costs. Before the euro was established, it was difficult for countries to keep large amounts of each individual EU national currency, so currency reserves were usually held in USD. With the introduction of the euro, the trend is shifting in favor of holding it as the reserve currency, and this trend is expected to continue as the EU leverages its trading power.

Economic Policy Makers and Tools

The European Central Bank (ECB) was established as the central bank for the EMU countries, with the goals of maintaining the purchasing power of the euro and price stability within the EMU. The responsibilities of the European Central Bank include implementing monetary policy, conducting foreign exchange operations and managing foreign reserves. The ECB's governing council is the decision-making body, consisting of a six-member executive board and leaders of all the central banks from the EMU member countries. The governing council meets twice a month to discuss monetary policy. At the first meeting of the month, they assess monetary and economic developments and make monetary policy decisions.

The ECB uses open market operations to influence interest rates and manage market liquidity. This is done through outright transactions, reverse transactions, issuance of debt certificates, foreign exchange swaps and collection of long-term deposits. These operations can be executed through standard tenders, quick tenders or bilateral procedures.

Standing facilities are used to control overnight liquidity and bind overnight interest rates. Counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks against eligible assets. The interest rate provided by the marginal lending facility typically provides the ceiling for the overnight market interest rate. Counterparties can also use the deposit facility to make overnight deposits with the national central banks. The interest rate provided by the deposit facility typically provides a floor for the overnight market interest rate.

Minimum reserves are applied to banks in the EMU to set money market interest rates and reduce liquidity. The minimum reserve rate lets banks make use of averaging provisions to meet the goal of stabilizing interest rates.

A minimum bid rate is set as the interest rate that the ECB offers to the central banks of its member states. Rate changes are announced at the biweekly governing council meetings, and are watched closely for the impact on the euro.

Characteristics and Trends

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* The “Average Bid / Offer” listings above are illustrations of how the average prices or spreads of a listed currency pair may appear.
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Economic Indicators for the United Kingdom

Economic Overview

The U.K. has the seventh largest economy in the world, with a 2005 GDP of US$1.867trl. GDP growth rates slowed from 2001 to 2005, as the high value of the pound and the global downturn hurt the U.K.'s manufacturing and exports. The per capita GDP was estimated to be $30,900 in 2005.

The U.K. is the world's fifth largest importer and the seventh largest exporter. Important trade partners include the U.S., Germany and France. The U.K. has a fairly large trade deficit of $111 billion, and the world's second largest national debt, at $US7.107trl.

The U.K.'s agricultural industry is highly efficient compared to other European countries and produces about 60 percent of the country's food needs with only 1.5 percent of the labor force. Service-oriented occupations such as banking, insurance and business services comprise 79.5 percent of the labor force, and account for the largest portion of the country's GDP. The U.K. has significant coal, natural gas and oil reserves; primary energy production accounts for 10 percent of GDP, one of the highest shares of any industrial nation.

During the past 20 years, the U.K. government has greatly reduced public ownership and limited the growth of social welfare programs. The government has raised public taxes to support education, transportation and health services.

The U.K. economy is one of the strongest in Europe, with relatively low inflation, unemployment and interest rates. Although the U.K. is a member of the European Union, recent public opinion polls have shown that the majority of citizens oppose the U.K. joining the European Monetary Union and adopting the euro, due in large part to the strong performance of the U.K. economy.

Economic Policy Makers and Tools

The Bank of England (BoE) is the central bank of the U.K. The Bank of England was founded in 1694, nationalized in 1946, and gained independence in 1997. The overall goal of the BoE is to promote and maintain monetary and financial stability to contribute to a healthy economy. The BoE has exclusively issued the country's currency since the 1900s, and has been responsible for setting the U.K.'s interest rate since 1997.

The Bank of England's monetary policy committee sets interest rates to meet the inflation target for the U.K. economy. The inflation target is set annually by the Chancellor of the Exchequer, and the BoE implements its interest rate decisions by setting the bank repurchase (repo) rate, which is the interest rate at which the BoE lends to banks and other financial institutions. This is the key rate used in monetary policy to meet the inflation target. The monetary policy committee holds monthly meetings, which are often followed by announcements stating changes in monetary policy and interest rates. The committee also publishes two quarterly reports, the Inflation Report and the Quarterly Bulletin. The report provides growth and inflation forecasts for the following two years, and the bulletin provides analysis of the international economic environment and the impact on the U.K.'s economy.

The Bank of England's open market operations are typically conducted daily through two rounds of operations at the official bank repo rate. If these operations are not sufficient to relieve any liquidity shortage, then there is also an overnight operation and a late repo facility for settlement banks. Overnight operations are conducted at a higher rate than the official rate. The BoE also makes a daily overnight deposit facility at a lower rate than the official rate available to its counterparties. These overnight rates set the upper and lower bands of the market rates and are designed to allow active trading but moderate undue volatility, which could complicate banks' liquidity management and deter the use of money markets by non-financial companies.

British Pound vs. Euro

Monetary policy regarding the argument for and against the adoption of the euro is closely followed. Because the U.K. is presently implementing successful monetary and fiscal policies, the country has outperformed most major economies, including the EMU. The majority of voters see no reason for the U.K. to join the EMU, especially since the EMU has faced problems with implementing a single monetary authority for its 12 member countries.

Government officials in the U.K. are highly concerned with voter approval ratings. If voters do not fully support entry into the EMU, the likelihood of entry greatly declines. Any speeches and comments from government officials regarding the EMU, especially from the U.K.'s prime minister or treasury chancellor, and relevant public opinion polls, will impact the currency markets. Favor toward adopting the euro tends to put downward pressure on the British pound (GBP), while opposing entry typically boosts the GBP. In order for the U.K. to adopt the euro, interest rates would have to decrease significantly, and an interest rate decrease would encourage traders to sell GBP. The British pound would also weaken because of the uncertainties involved in deciding to adopt the euro.

Characteristics and Trends

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Economic Indicators for Japan

Economic Overview

Japan has the world's second largest economy. Japan is the fifth largest exporter of goods in the world, which has resulted in a consistent trade surplus for the country, valued at US$99.4bln in 2005, and created an inherent demand for the JPY. Japan's largest trade partners are the U.S. and China. In recent years, China's inexpensive goods have allowed the country to gain a larger share of Japan's import market. Japan has a fairly large national debt of US$1.545trl.

Japan is among the world's largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The robotics industry is a key long-term economic strength because Japan possesses more than half of the world's "working robots." As a highly industrialized nation, the country is heavily dependent on imported raw materials and fuels. The small agricultural sector is highly subsidized and protected, with crop yields among the highest in the world.

Japan's economy experienced a major slowdown in the 1990s, following three decades of record growth. Growth expectations during the 1980s led to major hikes in asset prices and rapid credit expansion, developing an “asset bubble.” Between 1990 and 1997, the bubble collapsed, resulting in dramatic drops in asset and real estate prices. The net loss was equal to two years of Japan's national output. Many developers defaulted, and the country's banks were faced with bad debt and worthless collateral. The banking crisis had a major impact on the Japanese and global economies, and bad debts, falling stock prices and the collapsing real estate market have continued to plague the Japanese economy for the past two decades. The current economic crisis revolves around the resolution of the banks' non-performing loans (NPLs). The Japanese Ministry of Finance and Bank of Japan (BoJ) are still trying to resolve this problem, and have poured funds into the ailing banks to attempt to prevent bankruptcies and to grow the banks back to a healthier balance sheet. As a result, the banking sector has become very dependent on the government, and the Japanese yen (JPY) is very sensitive to political developments, including speeches by government officials that may indicate changes in monetary and fiscal policy or attempted bailout proposals.

Despite the banking crisis of the 1990s, Japan is still a major economic force. Government and industry cooperation, strong work ethic and rapid technological advances have propelled Japan to the rank of the second most technologically powerful economy in the world after the U.S.

Economic Policy Makers and Tools

The Bank of Japan directs the country's monetary policy, with a goal of maintaining stability of prices and of the financial system, thereby laying the foundations for sound economic development. The BoJ's monetary policy board determines the basic guidelines for monetary policy at its monetary policy meetings. At the policy meetings, the board assesses the economic and financial situation to determine the guidelines for the BoJ's money market operations. The results are released in the Monthly Report of Recent Economic and Financial Developments. The BoJ also releases the quarterly Tankan Survey, an economic survey of Japanese businesses, which is also used to formulate monetary policies.

The Bank of Japan conducts its daily money market operations to achieve a target money market rate by purchasing or selling Japanese government securities and bills, or by making loans to financial institutions. The BoJ supplies funds to financial institutions when it purchases government securities or bills, and absorbs funds when it sells them. Loans extended and collected by the BoJ to financial institutions are another method of controlling fund levels. By adjusting the amount of funds it supplies or takes in, and managing the timing of these adjustments, the BoJ is able to control money market rates. Money market rates, in turn, affect interest rates in other financial markets and the lending rates that financial institutions charge on loans to firms and individuals. In this way, money market rates can affect economic activity by influencing decisions made by firms and individuals.

The Minister of Finance can instruct the Bank of Japan to conduct foreign exchange intervention by buying or selling yen for foreign currencies. When the BoJ intervenes, it uses government funds, specifically those in its Foreign Exchange Fund Special Account (FEFSA). Since the introduction of floating exchange rates, Japan's interventions in the foreign exchange market have primarily taken the form of yen sales because Japan's currency has often faced rapid appreciation. When Japan's Minister of Finance deems it necessary to intervene in the foreign exchange market due to major fluctuations in the yen, he gives the BoJ instructions to conduct intervention operations in the form of foreign currency trades. There are typically three factors behind Japan's foreign exchange interventions: the amount of appreciation or depreciation in JPY, the current USD/JPY rate, and the formation and direction of speculative positions.

The Bank of Japan controls the amount of money in the economy and the interest rate on a daily basis through open market operations. The goal of these open market operations is to control the operating target, which is recognized as the uncollateralized overnight call rate. This is the shortest-term rate, and is seen as the standard rate for longer-term rates in the call market and in other markets. In order to maintain zero interest rates, the BoJ targets zero interest on the overnight call rate through its market operations. This is completed through sales and purchases of money market instruments.

Characteristics and Trends

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Economic Indicators for New Zealand

Economic Overview

New Zealand has a fairly small economy compared to other industrialized nations, with its 2005 GDP valued at approximately US$97.39bln. The country's population is equivalent to half of the population of New York City, although it inhabits an area more than 300 times as large. During the past 20 years, New Zealand's government has transformed the country into an industrialized, free market economy that competes globally. This rapid growth has boosted incomes, increased the technological advancements, and controlled inflation. Per capita income has risen for seven consecutive years, and is now valued at $24,100.

New Zealand depends heavily on trade, especially of agricultural products, to drive the country's growth. Exports of goods and services represent about 20 percent of GDP. The country's trade deficit is US$2.36bln. Due to the small size of the economy and its significant trade activities, New Zealand is highly sensitive to global performance, especially with its key trading partners, Australia, the U.S., Japan and China. New Zealand's national deficit is comparatively small, at US$57.67bln.

Because of New Zealand's small population, increases in migration can have significant effects on its economy. Between 2002 and 2003, the population growth rate increased 2,205 percent. This increase in migration noticeably affected the economy, due to the increase in overall consumer consumption.

New Zealand's GDP is very sensitive to severe weather conditions that can damage farming activities. Recent droughts within the country have injured its economy, but droughts in Australia can also negatively impact New Zealand's economy.

Economic Policy Makers and Tools

The Reserve Bank of New Zealand (RBNZ) is the country's central bank. The RBNZ seeks to maintain the stability and efficiency of the financial system through carrying out monetary policy, promoting and maintaining a sound and efficient financial system, and meeting the currency needs of the public. The RBNZ and its minister of finance outline monetary policy in the Policy Targets Agreement, with the most recent PTA requiring the RBNZ to keep inflation at a medium-term average between 1 to 3 percent.

The Reserve Bank of New Zealand sets the official cash rate (OCR), which is an interest rate used to implement monetary policy and maintain price stability. The OCR is reviewed eight times per year. When an OCR is set, the RBNZ will pay financial institutions an interest rate 0.25 percent below the OCR for money deposited in the bank's settlement accounts. The Reserve Bank of New Zealand also provides overnight cash to banks against good security, charging interest at 0.25 percent above the OCR. The RBNZ does not set a limit on the amount of cash that it will take in or let out at 0.25 percent above or below the OCR. The effect of this is that no bank is likely to offer short-term loans at a rate significantly higher or lower than the official cash rate because other banks would undercut the rate or receive interest at the OCR level. Therefore, the RBNZ is able to lend or borrow overnight money in whatever volumes are needed to keep the market interest rate at the bank's OCR level. By controlling short-term interest rates this way, the Reserve Bank of New Zealand influences short-term demand in the economy, putting upwards or downwards pressure on average prices.

The Reserve Bank of New Zealand also borrows or lends cash through open market operations to offset the government's daily transactions. The RBNZ uses repurchase agreements (repos) to withdraw cash and reverse repos to supply cash. Every banking day at 9:30 a.m., the RBNZ announces the details of its open market operations, including the repurchase date for each of the agreements, and how much it is willing to borrow or lend for each date. Then, for the next 15 minutes, settlement account holders can submit bids, expressed as interest rates. Because these repos are usually for only a few days, the interest rate in a repo tends to be close to the RBNZ's official cash rate. The Reserve Bank of New Zealand announces a minimum rate at which it will lend or a maximum at which it will borrow, depending on whether it is depositing or withdrawing cash on the day. The minimum or maximum is estimated from market rates, and is designed to ensure that the RBNZ conducts transactions at fair market rates. Sometimes its open market operations fail, in that there are not enough acceptable bids to fully offset the government's cash flows. If this happens, the institutions will need to use an overnight repo facility to make up any shortages.

Characteristics and Trends

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Economic Indicators for Switzerland

Economic Overview

Switzerland is a prosperous and stable modern market economy with the 30th largest overall GDP, but the tenth highest per capita GDP. After annual GDP growth dropped between 2001 and 2003, it experienced small gains in 2004 and 2005. Even with the drops in GDP, unemployment has remained at less than half the European Union's unemployment average. Switzerland's low unemployment rate and highly skilled labor force contribute to the country's steady economic success.

Switzerland is viewed as a safe haven for investors, because it has maintained a degree of confidentiality through the Swiss banking law, which regulates what types of information the banks can disclose. As a result, Switzerland is the world's foremost destination for offshore capital and investors. This has created a large and highly advanced banking and insurance industry that employs about half of the population and comprises more than 70 percent of the total GDP. Since Switzerland's financial industry thrives on its safe haven status and renowned confidentiality, capital flows tend to increase during times of global risk aversion.

Germany is Switzerland's most important trade partner, followed by the U.S., France and Italy. Major exports include machinery, chemicals, metals, consumer products and agricultural products. The country has a trade surplus of US$13.6bln, one of the highest in the world, and a national debt of US$856bln.

Economic Policy Makers and Tools

The Swiss National Bank (SNB) was established in 1907 as Switzerland's independent central bank. The Swiss National Bank strives to maintain price stability, while taking economic development into account. Like other countries, the SNB values price stability for long-term growth and prosperity. The SNB equates price stability with no more than a 2 percent increase in the national consumer price index.

The Swiss National Bank closely monitors exchange rates because excessive strength in the Swiss franc causes inflation. This is especially true in environments of global risk aversion, when capital flows into Switzerland tend to increase. As a result, the SNB typically favors a weak franc, and does not hesitate to intervene in the market.

The SNB's quarterly bulletin includes a monetary policy report for the quarterly assessment of the governing board. The report discusses monetary policy decisions and provides an inflation forecast for the next three years. In its annual financial stability report, released in June, the SNB presents its assessment of the stability of the Swiss banking sector and financial market infrastructure and highlights observable trends in the banking system, financial markets and the macroeconomic environment. The main purpose of the report is to draw attention to weaknesses or imbalances that could threaten the stability of the system.

The Swiss National Bank conducts open market operations to influence monetary policy. Repurchase (repo) transactions are the most important open market tool used by the SNB. With this type of repo, a financial institution sells securities to the SNB, and agrees to repurchase the same type and quantity from the SNB at a later date. The bank pays interest for the term of the agreement. If there are any price fluctuations in the securities, the bank or the SNB must deliver additional securities or cash. Repo terms range from one day to a few months. Other open market tools include foreign exchange swaps and advances against securities, otherwise known as Lombard loans (a common European term for securities-based lending).

In order to implement monetary policy, the SNB sets an interest rate target range for the London Interbank Offered Rate (Libor) rate for three-month Swiss franc (CHF) deposits. The SNB uses repos to supply banks with more or less funds to ensure that the Libor rate remains within the target range. The SNB sets a target range for Libor of one percentage point within which the rate can fluctuate. An increase of the target range signals a tightening of monetary policy, while a reduction signifies an easing of the policy.

Characteristics and Trends

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Economic Indicators for the United States

Economic Overview

The U.S. economy is the largest in the world, with a GDP of US$12.37trl, which accounts for almost 21 percent of the world's total gross product. With a 3.5 percent growth rate from 2004 to 2005, the U.S. posted strong growth results compared to other major industrial countries, due in large part to substantial gains in labor productivity. The U.S. has the fourth largest labor force in the world. The estimated per capita GDP is $41,800, which is the second highest in the world.

The U.S. is a leading world industrial power, and is also highly diversified and technologically advanced. The market-based economy is largely service-oriented, with approximately 79 percent of firms in the service sector, 20 percent in industry, and 1 percent in agriculture.

The U.S. imports significantly more than any other country in the world, and is the third largest exporter of goods. The country's most important trade partner is Canada, largely due to the proximity of the two countries. The U.S. has a very large net trade deficit of $799.5bln, which can be attributed to the fact that the U.S. is the largest trading partner for many countries. The U.S.'s external debt exceeded $8.84trl in 2005, the highest of any country.

The response to the terrorist attacks on September 11, 2001, highlighted the strength and resilience of the U.S. economy. The war and the U.S. occupation of Iraq led to considerable shifts of national resources to military funding. Long-term issues for the U.S. include insufficient investment in the country's economic infrastructure, rapidly rising medical and pension costs for the aging population, skyrocketing energy costs, the large trade and budget deficits, and widening family income gap between the lower and upper economic classes.

Economic Policy Makers and Tools

The Federal Reserve was founded in 1913 as the central bank of the U.S. The Federal Reserve is described as “independent within the government,” because its decisions do not have to be ratified by the President or any other member of the executive branch of the government. However, it is subject to regulatory supervision by Congress. The Federal Reserve sets national monetary policy to promote the objectives of maximum employment, stability in the purchase power of the dollar, and moderate long-term interest rates.

The Federal Open Market Committee (FOMC) oversees market operations. The FOMC holds eight annual meetings, in which interest rate changes and economic expectations are announced. The FOMC also forecasts GDP growth, inflation and unemployment rates, which are released by the Federal Reserve in the biannual Monetary Policy Report in February and July. The Monetary Policy Report is followed by the Humphrey-Hawkins testimony, in which the Federal Reserve Chairman responds to questions from members of Congress and the banking committees regarding the contents of the report.

One way that the Federal Reserve manages monetary policy is through the use of open market operations, which are conducted by the Open Market Trading Desk. The Desk purchases and sells government securities based on projections for the supply and demand of Federal Reserve balances. These can be long-term operations, to balance a deficiency or surplus for weeks or months, or short-term operations, to adjust the federal funds rate so that it is near the target rate set by the FOMC. When the Fed purchases securities, interest rates decrease, and when they sell securities, interest rates increase.

The Federal Reserve sets the federal funds rate as a key policy target. This is the interest rate that the Fed charges on overnight loans between banks. The rate is set to maintain price stability and limit inflation. This rate influences other interest rates throughout the U.S. economy, and can vary daily. In order to stay near this rate, the Fed can conduct short-term open market operations.

The U.S. Department of the Treasury also influences economic policy. It is responsible for issuing government debt and for making fiscal policy decisions, including tax levels and government spending. The U.S. Treasury gives instructions to intervene in the foreign exchange market by selling or buying the USD if they feel that the exchange rate of the USD is over or undervalued.

Characteristics and Trends

From 1994 until mid-2005, the RMB was informally pegged to the USD. This policy was acclaimed during the Asian financial crisis of the 1990s, as it prevented competitive devaluations. In 2003, the policy came under criticism by the U.S. as the dollar's dropping value caused the value of the renminbi to fall, which led to pressure from the U.S. and other countries to increase the value of the RMB to encourage imports to China and decrease exports.

In 2005, the peg to the USD was removed. The RMB is now pegged to a basket of currencies, dominated by the USD, EUR, JPY and KRW. As the government continues to reform its economic policies and strengthen its banking systems, there should be a realistic call for opening up spot trading. However, this will take some time. There is no RMB forward market, only spot FX. The non-deliverable forward market is not traded onshore. There is no interbank money market beyond four months. The bond market is restricted to designated onshore financial institutions and is illiquid.

The Czech koruna has been a floating currency since 1997, when political and financial crises shattered the country's image as one of the most stable and prosperous post-Communist nations. The CZK was forced out of its fluctuation band due to fears that the country's account deficit would become unsustainable. After the central bank unsuccessfully spent US$3bln to boost the currency, the bank decided to let the koruna float. In 1999, the Czech government established a focused restructuring program, which encouraged the sale of firms to foreign companies. Growth has been boosted by exports and strong recoveries in foreign and domestic investments. Admission to the EU has also spurred growth and structural reform.

Foreign investors have unrestricted access to the local markets. The banks of London are very active in the Czech Republic's currency market, and are estimated to account for over half of the daily turnover. The deposit market is very liquid, and foreign investors are very active.

The HKD has been pegged to the USD since 1983. Hong Kong's currency board system ensures that the country's entire monetary base is backed with USD at the linked exchange rate, so a bank can only issue a HKD if it has the same amount of USD on deposit. In 2005, the upper and lower interest rate limits were adjusted to narrow the interest rate gap between Hong Kong and the U.S.

No distinction is made between local and offshore trading. FX options are available. There are no spot or forward trading restrictions, but documentation is required. In 2005, Hong Kong began to open up the NDF market. There is a liquid government bond market (Exchange Fund Notes) with maturities of up to 10 years. Interest rate swaps and options are liquid up to 10 years.

After the constitutional amendment of 1989, which established Hungary as a democracy, the forint saw annual inflation figures of 35 percent over three years before it was stabilized by market economy reforms. The relatively high value of the forint has put the export-oriented Hungarian industry at a disadvantage against foreign competitors with lower-valued currencies. The forint has been a fully convertible, and generally floating, currency for current and capital account transactions since 2001.

As part of Hungary's integration into the EU, the forint is scheduled to be phased out from 2010 to 2012. Currently, there are questions regarding whether the EU-mandated low inflation rates and reduced foreign debt goals can be met by 2010, which could make Hungary one of the last countries among the current EU members to adopt the Euro.

The exchange rate of the rupee is set by the interbank market. Since 2000, this has been managed by the Reserve Bank of India and is classified as a managed float regime. Documentation is required for offshore trading. NDFs and FX options are available. It is widely speculated that the INR will be among the first of the emerging markets to become spot eligible without restrictions or documentation. There is a very liquid bond market with maturities of up to 25 years available, based on the government's need to fund the persistent budget deficit. Interest rate swaps are available onshore and are traded up to 10 years, with mixed liquidity.

The won is a floating currency. Local and offshore markets are treated separately. Documentation is required for delivery at maturity offshore and for forward FX contracts. NDFs and FX options are traded. There are no trading restrictions. Interest rate swaps are available and are traded up to 10 years, with interest rate options also offered.

In 1994, a Mexican economic crisis was triggered by the planned but sudden devaluation of the peso. Because the peso was widely recognized as overvalued, the government abruptly announced that it would let the exchange rate float against the USD. Within a week, the exchange rate fell from three MXN per USD to 10 MXN per USD. The currency crisis was stabilized when the U.S. granted Mexico a US$50bln loan to save the Mexican economy.

Today, both FX and the local debt markets are very liquid. The government issues bills with terms ranging from one month up to one year on a weekly basis, according to a pre-announced schedule. The government also issues longer-term MXN securities with up to a five year maturity, but the short end is most liquid. The government has issued MXN denominated securities since 1995, and inflation-linked bonds since 1996. The extension in the yield curve that resulted from the more stabilized macroeconomic framework in recent years has allowed Mexican firms to issue peso-denominated securities with medium term tenors in the domestic market. Interest rate swaps are liquid up to five years and are traded up to 10 years.

The zloty has been a floating currency since 2000. It is convertible for current account transactions. Most money market transactions are conducted through forex swaps for offshore investors. Domestic security exposures can be hedged in the domestic forward market by offshore investors. An offshore interest rate swap market has been developing fast, with the five-year and less being the most liquid part of the IRS curve.

Poland's accession to the EU means that the country will eventually adopt the euro. In 2006, the Polish government stated that it will adopt the euro no sooner than 2010, pushing the deadline back from the previously stated goal of 2008. Economic conditions could further delay the adoption of the euro.