Major central bank rundown
The central banks are listed below with their current state of play. The link for each central bank is included in the title of the bank and the next scheduled meeting is in the title too.
Reserve Bank of Australia, Governor Phillip Lowe, 0.10%, Meets 02 March
The Reserve Bank of Australia met on February the 02 and delivered a surprise to the markets. They kept the interest rate and the 3yr bond yield target unchanged at 0.10%. This was as expected. Like December’s meeting the RBA noted that the recent economic recovery had been based on significant fiscal and monetary support. The RBA said they will not increase interest rates until actual inflation is above the 2-3% target range. This means that interest rates are expected to stay as they are until 2024. There was, however, a change. That change to monetary policy was the expansion of the RBA’s bond purchases. Bond purchases were extended by $AUD100 billion. This was slightly unexpected as some desks had been expecting the possibility of QE coming to an end in April on the back of stronger labour data.
Like last time, the RBA’s statement was generally quite upbeat, despite the dovish twist in their policy action. Remember that QE purchases weaken a currency, so the AUD was weaker out of the meeting. You can read the whole statement here from the RBA. The optimistic tone was affirmed by the Australian Treasury Secretary Kennedy who said that the recovery exceeded expectations and the labour market participation is somewhat surprising.
Remember that the Australian economy is closely tied to China’s economy. Approximately 30% of Australia’s GDP comes from its trade with China. Therefore, expect the AUD to be pushed or pulled along with the US-China trade sentiment. A falling S&P500 tends to weaken the AUD and vice versa, so keep an eye on the latest US stock moves as well in deciding the next path for AUD. The AUD should remain supported medium term on the reflation narrative.
European Central Bank, President Christine Lagarde, -0.50%, Meets March 11
The ECB repeated that Interest rates are expected to remain low until the inflation outlook moves up to a level sufficiently close to, but below 2% within its horizon framework. However, there was a shift in the language about the PEPP programme size. The key takeaway was the emphasis shift about the full use of the PEPP envelope. The ECB reminded markets that the full envelope does not necessarily have to be used. This is a decidedly more upbeat message and is an acknowledgement to ECB policy makers who did not want such a large PEPP envelope in the first place. The total amount of the PEPP envelope remains at €1850 billion with purchases are set to remain until at least the end of March 2022.
In the press conference just after the announcement Christine Lagarde echoed this positive sentiment reflected in the statement noting that risks to growth is still tilted to the downside, but less pronounced. This now sees the ECB joining the ranks of the central banks who are turning more upbeat due to vaccine optimism. One interesting point is that the ECB are asking staff to come up with new gauges to help with stimulus decisions as well as a new gauge of euro area financial conditions. The proposals are wanted from staff for March. Finally, with regard to the EURUSD exchange rate Lagarde said that the ECB was carefully monitoring FX rates.The ECB don’t like a strong EURUSD as it harms euro exporters and if the EURUSD gets too strong, too fast the ECB may act. She repeated that no-tools are off the table.
The reaction of the EURUSD after the decision was very muted and mainly dollar driven. The bog picture remains that are pressures on the eurozone which may face a double dip recession and is slow with the vaccine roll outs. If the US starts to outperform Europe in terms of GDP growth and vaccinating their citizens far more quickly this will weigh on the EURUSD going forward.
Bank of Canada, Governor Stephen Poloz, 0.25%, Meets March 10
Like the ECB the Bank of Canada also had a more optimistic outlook. The general hope is that the current vaccine will boost the world economy and central banks are starting to cautiously enter into that hope. The Bank of Canada signalled that they too can see some possible light at the end of the COVID-19 tunnel. Heading into the latest meeting there had been rumoured to be a slight chance of a very small rate cut mooted by market participants. However, these were unfounded and rates were kept unchanged at 0.25% and bond purchases remained at the CAD $4 billion per week level. The Bank of Canada repeated that interest rates were not expected to rise until 2023, like the Federal Reserve. However, the bullish twist for the CAD was due to see pretty hearty revisions for growth. End of 2021 growth is now seen as +4.6% vs +3.8% previously. Inflation was revised up to +1.5% vs +1.3%. The big push higher for oil has been helping the Canadian oil export economy and the growth revisions show the better outlook.
Macklem in the Press Conference
Macklem’s noteworthy comments in the press was the BoC’s concern about a stronger CAD. The rise in CAD does provide some risks to the outlook for the Canadian economy, so the BoC will not want to thwart their own hand by appearing ‘too rosy’ on Canada’s prospects. Out of the event, the CAD rose sharply (USDCAD falls) sensing a better outlook for Canada. The OiS futures curve suggest that the BoC is likely to keep rates at the current level for the foreseeable future.
Remember that stronger oil supports the CAD as around 17% of all Canadian exports are oil-related. There is negative correlation between USD/CAD and oil has broken down recently. Canada’s top export is Crude Petroleum at over $66 billion and around 15.5% of Canada’s total exports.
Federal Reserve, Chair: Jerome Powell, 0.125%. Meets March 17
The US rates were left unchanged at the January meeting, as expected. The Fed recognised there was a ‘moderation’ in the pace of the US recovery in recent months and managed on balance to strike the right note between vaccine optimism yet sufficient dovishness. If they were too hawkish there would be a risk of a 2013 taper tantrum repeat. In the press conference after the statement, Powell said that he considered real levels of unemployment to be closer to 10% in the US. Two key points of market focus was bind tapering and inflation.
Bond tapering: One key aspect that was anticipated before the meeting was whether the Fed would mention anything on bond tapering. The consensus view was that this would be unlikely. Powell kept to the expected line and stated that it was, ’too early to talk about tapering’. This reassured markets. Powell went a little further and said that more could be done with bond purchases. This was the right message for the market to hear and hit the right dovish notes.
Inflation: Powell said the Fed will not react to small and transient inflation rises. This is to avoid the scenario where markets start pricing in interest rate rises on the first sign of inflation. Investors will almost certainly do this anyway, but Powell is wanting to warn against that. There were no comments on the exact levels of inflation as you would expect, but Powell said he would ‘welcome’ higher inflation.
The takeaway is that the Fed is on hold and their bias is to strike a balance that sounds a little hopeful but doesn’t get the market thinking that bond tapering is coming. At some point, the US will come out of this crisis and if it comes out strongly watch the US dollar for gains and the US10 year yields should lead that story. You can read January’s full statement here.
Bank of England, Governor Andrew Bailey, 0.10%, Meets March 18
Brexit, Covid-19, and a slowing economy all continuing to weigh on the GBP. The BoE kept interest rates unchanged at 0.10%. The November meeting saw GBP buying on a luke warm sentence on negative rates. The Bank of England said that ‘participants attach some weight to the possibility of a negative bank rate’. Investors had been hoping for a more enthusiastic move towards negative rates. The last Bank of England rate meeting was always going to be about one thing; would the bank walk towards or away from negative interest rates? Since the start of the year Governor Bailey’s comments had been interpreted as walking back market expectation from the Bank using negative interest rates. The fact that the UK managed to avoid a ‘no-deal’ Brexit would have been a big sigh of relief to Governor Bailey. Perhaps it was this that helped him mentally walk back from the use of negative interest rates. It was certainly referred to in the MPC (Monetary Policy Committee) minutes as a point to note.
The last Bank of England meeting cemented the Bank Of England’s aversion to using negative interest rates. The UK 10 year bond yield chart shot higher as bond traders started to price out any remaining expectations of the Bank of England using negative rates. There is now a tail risk of a rate hike coming into the markets. Remember, that although the Bank of England announced preparations for PRA regulated firms to implement a negative bank rate the bank made it clear this was ‘not a signal about the future path of monetary policy’. This was about form rather then intention. Call it the British love of bureaucracy. The GBP was supported out of the meeting as the MPC had a ‘materially stronger than expected’ view on growth. You can read that sentence here in the Bank’s report. This was partially reflected in the UK Q4 preliminary GDP figures out yesterday. This has helped the GBP higher. Any hikes in interest rates are only set to come when there is ‘clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably’.
Swiss National Bank, Chair: Thomas Jordan, -0.75%, Meets March 25
The SNB interest rates are the world’s lowest at-0.75% due to the highly valued Franc. As an export-driven economy they hate a strong CHF and are doing their best to make it as unattractive as possible. The market largely ignores this and keeps buying CHF on risk aversion which has been here in one form or another since around 2008/2009 if the EURCHF chart is anything to go by.
In December the SNB left rates unchanged. The inflation forecast was unchanged from Septembers forecast in terms of the longer-term view. . The forecast for 2020 was -0.7% (vs -0.6% forecast in September) and +0.0% for 2021 and +0.2% for 2022. In short, they see the outlook for 2022 remaining the same. The SNB projected that GDP would shrink by 3% in 2020. Growth for 2021 is seen between 2.5% -3.0%. The statement struck a tone of optimism vs ‘who knows what will really happen’ with upside and downside risks stated.
The SNB continue to intervene in the FX markets. The Swiss are always mindful of the EURCHF exchange rate because a strong CHF hurts the Swiss export economy. The SNB want a weaker CHF. The rest of the world wants CHF as a place of safety in a crisis, so we have this constant tug of war going on. No changes are expected for December’s meeting. However, if the reflation trade really takes off in earnest then expect EURCHF buyers. There is not really much going on with the SNB that is tradable. The CHF remains best used as a risk on/ risk off go to currency. However, in my eyes, it plays second fiddle to the JPY. Read the full statement here.
For more details on the sight deposits check out SNBCHF.com. This site called the removal of the floor back in 2015, so well worth checking out.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets March 19
The Bank of Japan met on January 20 and 21 The Bank of Japan is another very bearish bank and the latest meeting saw no major shift. The Bank, like others, warned of downside and upside risks as they too struggle to see into the future. They kept monetary policy as expected and rates unchanged at -0.10%. The Yield Curve Control is maintaining its flexible target with 10yr JGB yields at around 0%. Projections were revised higher. Fiscal median forecast was 3.9% for next year from 3.6%. Core CPI was -0.4%. In the big picture Inflation in Japan continues to miss the 2% target and the BoJ have stated that they will ‘keep very low interest rate levels for an extended period of time’. All in all the BoJ remained on the fence at this last meeting. There had been chatter about whether the BoJ would exit their large scale purchases of ETF’s and loosen their grip on yield curve control. This was always going to be the wrong time for this and Kuroda said, ‘It’s too early to exit from our massive monetary easing programme at this point’. He added, ‘Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now’. Fair enough, point taken. You can read the summary of opinions here.
Reserve Bank of New Zealand, Governor Adrian Orr, 0.25%, Meets February 24
The RBNZ kept the asset purchase programme maintained at $NZD100 billion and introduced the new Funding for Lending Programme as planned. Furthermore, the RBNZ maintained projections that the Official Cash Rate would remain at 0.25% until March 2021. At first glance, all appears to be as expected. However, the detail shows revisions for inflation and employment. Inflation is now expected to rise to 0.9% in Dec 2021 vs the previous forecast of 0.3%. Employment was projected to still weaken further in the near term, but then pick up into this year. However, it was not just the more optimistic outlook that caused the market to buy NZD out of the last rate meeting. It was also the fact that the last RBNZ meeting was really designed to launch the Funding for Lending Programme. The whole principal of this programmes is that if rates did go negative banks could easily pass that savings onto customers. Here is an extract from the RBNZ’s statement:
“Members noted that the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor pass-through to lending rates closely. Members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus, and that it was the best tool to deploy at this time given the Committee’s principles for alternative monetary policy instruments.”
So, the RBNZ had needed to keep up some sense of why this is an important move at their last meeting. In theory they can still cut rates to negative and have deliberately kept that option open. However, the message given by Governor Orr speaks clearly as he resisted the calls to move rates negatively. Inflation pressure has been rising recently with 2-year inflation expectations coming at 1.89% vs 1.59% recently and the outlook for New Zealand looks pretty robust given their excellent handling of the COVID-19 crisis. The latest chatter is moving towards bond purchase tapering and rates rises next. Been a turnaround story helping the NZD higher against weaker currencies. You can read the last monetary policy statement here.