The April round of central bank meetings is well underway. The Reserve Bank of Australia met last week while the Banks of Japan and England and the European Central Bank meet this week. The Federal Reserve meets at month’s end. Their policies — up until now — have been as diverse as are their economies’ growth prospects. And with the Group of Seven (United States, United Kingdom, Canada, Germany, France, Italy and Japan) finance ministers’ meeting at the end of the week in Washington, analysts will be curious to see if the gap narrows between policy directions. While not a member of G-7, the Reserve Bank of Australia is included in the summary below because its policies have differed greatly from banks in the Northern Hemisphere even though some issues such as a soaring housing sector are similar.

Of the five central banks to be represented at the G-7 meeting, three have inflation targets while two do not. Only the Federal Reserve and Bank of Japan do not have specific inflation targets. Rather the Fed has a "comfort zone" while the Bank of Japan would just like some inflation. The graph below shows current central bank rates of the G-7 members along with a few other notable banks. At the writing, the interest rates for the G-7 range from a high of 5.25 percent for the Bank of England, 4 percent for the European Central Bank, 3.5 percent for the Bank of Canada, 2.25 percent for the Federal Reserve and 0.5 percent for the Bank of Japan. Only the Fed is aggressively reducing rates. The Bank of England is moving lower grudgingly while the Bank of Japan is stuck in place with little room to maneuver. Several of these banks had planned to increase their interest rates prior to the credit crunch that came to fore in August and have had to adjust policy to the new circumstances.

United Kingdom

The Bank of England has the highest interest rate of any G-7 member — and it will still have that distinction even after it lowers rates on Thursday from 5.25 percent to 5 percent as expected. While the UK has had problems similar to those in the U.S. — a credit crunch (a bank failure) and weakening housing sector — the degree has varied. But increasing dangers of a sharp housing market correction are heightening pressures on the Bank to lower rates more aggressively. The Bank of England has kept its eye on its 2 percent inflation target as it tries at the same time to staunch the problems emanating from declining home values and the credit crisis. It lagged other central banks in providing liquidity to the frozen markets.

Inflation as measured by the consumer price index (it uses the same methodology as Eurostat for its harmonized index of consumer prices) is running above its inflation target at 2.5 percent. Although the economy is weakening, areas such as consumer spending and tight labor markets are still showing resiliency. Some pressures emanating from higher interest rates and the resulting rising pound sterling against the U.S. dollar have hurt trade and therefore, the manufacturing sector. However, the currency has been declining and hitting new lows against the euro as traders expect to see the interest rate spread narrow as the Bank of England lowers rates while at the same time the ECB maintains its current 4 percent rate for the foreseeable future.

European Monetary Union

It can be safely said that the mantra of the European Central Bank is its focus on its inflation ceiling of near 2 percent. The latest flash estimate for the harmonized index of consumer prices was 3.5 percent on the year. During the current crisis, the ECB has continually cited its concerns about inflation and its goal of preventing second round effects. It has viewed the current situation differently than what is perceived by some other central banks. It views monetary policy as a separate entity and apart from the credit issues surrounding the current banking crisis. And despite the relatively high value of the euro, exports have held up surprisingly well, especially for Germany. The ECB has tackled the credit and liquidity crunches aggressively through its various lending facilities.

Canada

Canada has been reaping the benefits of the commodities boom and yet still finds itself intertwined with U.S. economic fortunes because most of its exports go to the U.S. Domestic demand has remained buoyant, as rising commodity prices and high employment have continued to support income growth. But Canada’s net exports have weakened, reflecting the slowing U.S. economy and the impact of the past appreciation of the Canadian dollar, which currently is about par with the U.S. equivalent. The Bank expects a significant spillover effect from deteriorating U.S. economic and financial conditions thanks to the prolonged adjustment in the residential housing market and resulting tight credit conditions. These developments suggest important downside risks to Canada's economic outlook.

The Bank of Canada has an inflation target range of 1 percent to 3 percent and focuses on the 2 percent midpoint. Their CPI is comfortably below the midpoint. The Bank now judges that the balance of risks for inflation has clearly shifted to the downside, and as a result, the Bank was able to lower the target for the overnight rate to 3.5 percent. The Bank of Canada has been active in providing liquidity to Canadian markets and has cooperated with international efforts to relieve credit market pressures.

Bank of Japan

The Bank of Japan longs to rationalize its interest rate policy but is still fighting deflation even though food and energy prices are rising. While producer prices are increasing at a 3.4 percent clip when compared with last year, producers are unable to pass on increases to consumers. Exports have been the economy’s driver and have generally made up for virtually non-existent domestic demand. But now the economy is softening primarily because of weaker exports to the U.S. and little domestic demand to fill the gap. The recently released Tankan survey showed that sentiment among large manufacturers (generally exporters) had dropped during the first quarter. Domestic demand continued to be weak and shows no sign of strengthening. The Bank has no where to go given its policy interest rate of only 0.5 percent to encourage growth via lower interest rates. To make matters worse, the BoJ has been leaderless because of political infighting between the two major political parties over the naming of a new governor. However, with the acceptance by the main opposition party of the government's candidate — deputy governor Masaaki Shirakawa — for bank governor, the problem seems to be resolved, and just in time for Friday’s G-7 meeting subject to approval by both chambers of the Diet (parliament).

Federal Reserve

While other central banks have moved cautiously in changing their policy interest rates, the Fed has moved aggressively simply because the problems originated in the U.S. The Fed’s reasons were to ease credit market woes while at the same time to bolster economic growth. The Fed has treated both problems as though they were intertwined. This is a far cry from the approach of other central banks and especially that of the ECB. Although the Fed has no official inflation target, it has justified its steep rate cuts by saying that according to their forecast, inflationary pressures currently evident should be easing by then. But current inflation — when measured by a common methodology as in the graph above — is clearly higher in the U.S. than in two inflation target focused areas, the UK and EMU.

The Fed has been bolder than other central banks largely because the U.S. economy is in trouble. But differences in central banks' official goals also play a role. The Fed is charged with promoting both growth and stable prices. Most other central banks and a major number in emerging economies are supposed to worry only about inflation.

Australia

Although Australia is not a G-7 member, RBA policies stand out simply because they are one of the few central banks that have initiated an aggressive series of interest rate increases over the last six months to stave off inflation, cool the torrid housing market and curb rampant growth. The Australian economy has been booming thanks to Asian demand for its commodities. But inflationary pressures have been ramping up thanks to this demand and the stress it has put on the labor force and physical facilities to fulfill this demand. Adding to inflationary pressures has been the epic drought that has gripped the country’s farm areas, reducing crop size. This has added to skyrocketing food costs elsewhere as well since Australia is the world’s second largest exporter of wheat. While the RBA in its latest statement has indicated that they are through increasing rates, analysts are taking a wait and see attitude. Consumer and producer price indexes are produced on a quarterly basis with data for the first quarter available at the end of April. Australia has benefited from inflows of funds from carry trades. Investors borrow in Japan with its low 0.5 percent interest rate to invest in Australia with its 7.25 percent rate.

Bottom line

The Fed has been busy. Since December 2007, besides reducing its fed funds target rate by a total of 2 percentage points (from 4.25 percent to 2.25 percent) the Fed has introduced credit facilities for commercial banks and primary dealers that will soon reach in excess of $300 billion. Despite these initiatives and other liquidity arrangements provided by European central banks, the liquidity premium in interbank rates remains elevated. The Fed, however, can affect liquidity premiums but not credit risk premiums. It cannot make banks lend or affect house prices, collateral values or home foreclosures. It does not have the tools to influence the solvency and deleveraging process, capital adequacy or accounting issues.

Other central banks have been doling out liquidity as well and include the Bank of England, the Bank of Japan and the ECB — but none has eased monetary policy with anything like the Fed's urgency. While the Fed fears recession and financial collapse, most central banks elsewhere are more worried about inflation. Rates in Britain and Canada have been cut but by much less than in the U.S. Japanese rates are unchanged. The ECB's policy rate is still 4 percent, unchanged from August 2007. Most other central banks have either kept rates unchanged or raised them. And many central banks, especially in Europe, worry that the Fed may be inviting a new bubble with its low rates. They fret that central bank credibility, so painfully built over the last 25 years, may now be at risk.

The gap between the Fed and the rest is having its most obvious effects in the currency markets. The dollar has tumbled against other leading currencies. On March 13th it sank below ¥100 for the first time in 12 years. It also sank to new lows against the euro and the Swiss franc. And as the dollar has dropped, commodities priced in dollars have surged.

Anne D Picker is the author of International Economic Indicators and Central Banks.