Major central bank rundown
It’s time for your central bank catch up. The link to the latest statement is at the bottom of each section, so just click there to read the bank’s central statement. Remember, there is no substitute for actually reading a central bank statement yourself and it will almost certainly be of great help. However, here is a summary analysis of the position of the major central banks.
Reserve Bank of Australia, Governor Phillip Lowe, 4.10%, Meets 4 July
RBA surprises with 25 bps hike and potential for further increases
Ahead of the RBA meeting, market participants were advised to monitor rate hike expectations between the RBA and RBNZ, particularly for potential opportunities in the AUDNZD pair. However, the RBA caught the market off guard by implementing an unexpected 25 bps hike, providing an additional boost to the AUDNZD pair. This move could also favour dip buyers, especially as the RBNZ hinted that it may have reached its terminal rate.
Addressing inflation concerns
One of the key factors that prompted the RBA’s decision to raise rates by 25 bps was higher inflation. The RBA board acknowledged that recent data indicated upside risks to the inflation outlook, while also noting the tightness of the labor market.
This decision aligns with the fact that headline inflation stands at 7% y/y, with core inflation at 6.6%. As there has been no clear decline in either measure, the RBA has acted to prevent further decreases. The resilience of the core inflation reading, which is over three times the 2% target, signals that the RBA still has work to do. Refer to the core reading below for a visual representation of its strength.
Anticipating future rate hikes
The Australian Treasurer has highlighted that the RBA’s rate hike reflects persistent inflation pressures, while the Board acknowledged that expectations of higher inflation are driving significant increases in both prices and wages. Immediately after the meeting Short-Term Interest Rate (STIR) markets anticipated a higher terminal rate of 4.27%, up from 4.04% prior to the meeting. Read the last RBA’s statement here.
European Central Bank, President Christine Lagarde, 3.50%, Meets 27 July
Embracing flexibility and monitoring key indicators
Prior to the recent ECB meeting, expectations of a 25bps rate hike were fully priced in, with a focus on forward guidance and rate trajectory the focus. Despite increased inflation expectations and lowered GDP projections, the ECB aims to maintain a flexible and data-driven approach.
Inflation problems linger
The ECB, led by Christine Lagarde, hinted at a probable rate hike in July. However, close monitoring of crucial economic indicators, such as core inflation and the tight labor market, will inform future decisions. Core inflation projections have been revised upwards, reaching 5.1% for 2023 and 3.0% for 2024. The most recent eurozone core inflation reading stood at 5.3% y/y after the ECB meeting. ECB’s Wunsch mentioned a potential September hike if core inflation remains around 5%. The core inflation reading on June 16 came in above 5% at 5.3% y/y.
The bond yield spread experienced a notable surge as both the Fed and the ECB adopted data-dependent approaches. Bond traders anticipate the Fed reaching its rate peak before the ECB. To assess the direction of EURUSD, it is a good idea to monitor the bond yield spread. Monitoring incoming labor and inflation data will provide insights into the answer. Any high inflation prints will likely lift the EURUSD on expectations of another hike to come. See the link for the ECB monetary policy decision.
Bank of Canada, Governor Tiff Macklem, 4.75%, Meets July 12
Bank of Canada hikes to tackle inflationary pressures
The Bank of Canada made an unexpected decision to raise interest rates by 25 bps, increasing its target for the overnight rate from 4.5% to 4.75%. This move comes in response to a series of positive economic indicators during the month of May for Canada, including robust job market data, a higher-than-expected GDP print, and elevated inflationary numbers.
Of particular note in May is the 4.4% inflation rate, surpassing all economists’ projections. The concern over sustained inflation above the 2% target has been a key driver behind the BoC’s decision to hike interest rates on June 7. Despite lower energy costs, goods price inflation has risen, while services price inflation remains at an elevated level. The removal of the language indicating a readiness to raise rates further from the previous meeting in April most probably suggests that the Bank of Canada is shifting towards a more data-dependent approach. Its focus will be on monitoring whether high inflation starts to recede. If inflation remains persistently high, it will continue to be a concern for the BoC and strengthen the Canadian dollar.
What to look for going forward
As before, Canadian jobs data will continue to be important as the BoC noted that the labour market remains very tight. For central bankers when they are setting policy high employment equals inflation pressure. Inflation, of course, will be important. The key tradable opportunities, therefore, will once again come from any out-of-consensus prints in either employment data or inflation data in the coming days before the next BoC meeting. The CAD at an index level has broken out of its 3-month range. Also, keep an eye on oil prices. Higher oil prices support CAD and the oil market is projected to tighten through 2023. The Bank will carefully assess core inflation dynamics, CPI inflation outlook, inflation expectations, wage growth, and corporate pricing behaviour to achieve the inflation target. Read the full Bank of Canada rate statement.
Federal Reserve, Chair: Jerome Powell, 5.125%. Meets 26 July
Federal Reserve: The end in sight?
The Federal Reserve’s June decision was closely watched, with speculation ranging from a pause to a skip or a hold on rates. Although the announcement seemed like a skip, Fed Chair Powell cautioned against labeling it as such. Powell has really signaled a more data-dependent approach from here on in for the Fed focusing on core PCE and jobs data. This was despite the dot plot moving 50bps higher. This was just to give the Fed options.
Core PCE’s impact on the decision
During the Q&A session, Powell emphasised the lack of significant progress in Core PCE (Personal Consumption Expenditures), a crucial inflation indicator for the Fed. The central bank is looking for a substantial downward movement in Core PCE. Consequently, if there is a significant miss in Core PCE data, it could lead to lower yields, a weaker USD, and potentially higher gold prices. Watch this Friday’s print (June 30).
The role of the labor market: The Phillips curve
The Fed pays close attention to the Phillips Curve, which illustrates the relationship between unemployment and inflation. According to this concept, there is an inverse relationship between the two variables. A tight labor market is considered inflationary due to increased worker bargaining power. However, recently the Fed has expressed more ease with having a strong labour market, so this is one narrative to watch for further shifts in the Fed’s thinking.
Positive jobs data and inflation signals
The June jobs report surpassed market expectations, with the US economy adding 339,000 jobs instead of the forecasted 190,000. Powell interprets this as an inflationary reading, suggesting possible upward pressure on prices. If future job reports show lower figures or a slowdown in job growth, it could weaken the USD, lower US 10-year yields, and potentially boost gold prices.
Flexibility in the Fed’s approach
Despite being labeled as a skip, it is crucial to understand that the Fed remains flexible. Chair Powell emphasised that projections are not set in stone, and decisions will be made on a meeting-by-meeting basis. The central bank will closely monitor jobs and inflation data, and if it shows a downward trend, it could prompt the Fed to transition from a skip to a pause stance. See June’s Fed statement here.
Bank of England, Governor Andrew Bailey, 4.50%, Meets August 2023
Inflation worries & growth concerns: The stagflation facing the UK
The Bank of England is facing the challenge of avoiding two potential problems: high inflation and a sharp slowdown in economic growth. The bank is currently trying to find a balanced approach to interest rates to steer clear of both issues. In June, the Bank of England raised interest rates by 50 bps with a 7-2 vote split, which was a surprise. In terms of the meeting on June 22, a Reuter’s poll on May 31 had 48/50 economics seeing the BoE hiking rates by 25bps to 4.75%. That same poll also now has economists projecting a 5% peak in 2023. That situation radically changed after the latest UK inflation data showed the core reading rising to 7.1% y/y.
The stakes have never been higher for Bank of England policymakers. Last week’s news that core inflation has risen to the highest level since John Major was in Downing Street has delivered another blow to the economy, and with headline inflation remaining at 8.7%, a 50bps rise was necessary to avert further policy failure. The BoE is unlikely to clearly signpost how high rates will go at this stage because the recent rapid pricing is disruptive for UK businesses and homeowners. However, investors should not rule out further hikes to come. Despite the stagflation and pain it will cause in the near-term, market expectations now see rates exceeding 6% in early 2024, and the threat of a recession looms more than ever. The risk from here is that there could be GBP falls on growing stagflation fears. Read the full BoE statement here.
Swiss National Bank, Chair: Thomas Jordan, 1.75%, Meets September 21
SNB signals more hikes ahead
On June 22, the Swiss National Bank (SNB) raised rates to 1.75% and hinted at potential future rate hikes. While headline inflation in Switzerland remains one of the lowest in the G20 at 2.2% y/y, the SNB has revised its inflation forecasts upward, citing ongoing second-round effects, higher electricity prices, and persistent inflationary pressure from abroad. Check out the latest forecasts below.
With average annual inflation projected at 2.2% for 2023 and 2024, and 2.1% for 2025, the SNB believes the battle against inflation is far from over. The next interest rate meeting on September 21 is expected to result in a 25 bps hike to 2.00%. Short-term interest rate markets anticipate a terminal rate of 2.12%, indicating optimism that the SNB is approaching the peak of its rates.
What does this mean for the future? Keep a close eye on incoming inflation data as it holds significant importance for the SNB’s rate policy. Higher-than-expected inflation could boost the Swiss franc (CHF) as markets anticipate higher rates. Conversely, a sharp decline in inflation data may lead to CHF depreciation, as hopes arise that the SNB will not need to hike rates again in September. Stay alert to incoming inflation data! You can read the SNB’s full statement here.
Bank of Japan, Governor Kazuo Ueda, -0.10%, Meets 28 July
BoJ fails to live up to yield curve end speculation
At the end of last year, the BoJ unexpectedly tweaked the Yield Curve Control band to +/- 0.50% in order to increase bond purchases to JPY 9 trillion in Q1 2023. At the time, the BoJ played down the significance of this move, saying it was to improve market functioning and encourage a smoother formation of the entire yield curve. However, speculation is still firmly in place that the BoJ is preparing to exit its ultra-loose monetary policy. Inflation in Japan is relatively low compared to inflation levels around the world even though the last reading in January was the highest in Japan since 1981 with a y/y reading of 4.3%. The BoJ, however, still doesn’t see the current inflationary pressures as sustainable, so it doesn’t want to hike rates to contain inflation like many other central banks around the world.
No exit surprise expected from BoJ
The BoJ has maintained its current stance once again and still remains committed to ultra-loose monetary policy. In its June meeting it delivered no surprises. It did stress that inflation expectations are now moving sideways after heightening. Since then, the BoJ has reminded markets that it is ready in principle to intervene in FX markets (it was worried about a rising USDJPY), but it has kept monetary policy on hold. Market speculation is that eventually, the BoJ will need to alter this. If/when it does, watch the JPY for potential strength. You can read the full BoJ statement here.
Reserve Bank of New Zealand, Governor Adrian Orr, 5.50%, Meets 12 July
During its meeting on May 24, the Reserve Bank of New Zealand increased interest rates by 25 basis points to reach 5.50%. While emphasising the need for continued restrictive interest rates to attain its inflation target in the foreseeable future, the RBNZ’s decision may mark the final rate hike, as it maintained its peak rate projection at 5.50%. This unexpected stance surprised the markets.
According to the RBNZ, inflation is anticipated to decline from its peak, but the core inflation indicators are expected to remain stable. With core inflation remaining considerably elevated at 7.3% year-on-year, it remains uncertain whether it has ceased rising. However, the RBNZ expressed confidence that inflation will eventually return to the desired 2% level by 2025.
The RBNZ observed a decrease in consumer spending growth, a decline in construction activity, and a stabilisation of house prices at more sustainable levels. Additionally, businesses are reporting reduced demand, and the labor shortage is no longer the primary constraint on business operations. Consequently, the RBNZ is confident in halting further rate hikes as it can see the impact of the current rates. The next meeting is coming on July 12th. You can read the full RBNZ statement here.