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 benefit to you. However, here is a summary analysis of the positions of the major central banks.
Reserve Bank of Australia, Governor Phillip Lowe, 3.85%, Meets 6 June
Surprised with a hike
On May 2, the RBA delivered a surprise 25 bps interest rate hike raising rates to 3.85% in a move that initially boosted the AUD. The central bank’s decision was influenced by stubbornly high inflation, which remains at 7%, and a tight labor market. The RBA believes it will take time for inflation to return to its target range of 2% and has affirmed its commitment to achieving that goal. Despite the uncertain outlook for household consumption, GDP is expected to rise by 1.25% this year and approximately 2% by mid-2025, with inflation predicted to be 4.5% in 2023 and 3% by mid-2025. The unemployment rate is expected to gradually increase to around 4.5% by mid-2025, and the Board is aware that further tightening of monetary policy may be necessary to ensure inflation returns to target in a reasonable timeframe.
What to look for now
Investors should monitor any changes in rate hike expectations between the RBA and RBNZ for any opportunities in the AUDNZD. This can be gauged by looking at the bond yield spread between the AU10Y and the NZ10Y. A divergence between the RBA and RBNZ could create a directional bias for the pair. The RBA meets on Tuesday, June 6. Could it surprise the markets with a hike? See the RBA’s statement here.
European Central Bank, President Christine Lagarde, 3.25%, Meets 15 June
One, two, or three more hikes to come?
The last ECB decision saw the ECB hike by 25bps. A rate hike in July is confirmed too, and the ECB also expects the end of the APP program as of July 1. However, the meeting did have a more bullish element, as inflation remains a significant issue for the ECB. The ECB not only maintained that it thinks inflation is too high in the eurozone but that it expects it to remain that way for some time.
Inflation problems
Christine Lagarde stated in the opening statement of the press conference that high inflation is a major challenge. “It’s been too high, for too long.” Christine Lagarde also linked high inflation forecasts with rate hikes larger than 25 bps when she said, “if projections put 2024 inflation at 2.1% or higher” the rate rise will be larger than 25bps. Headline inflation in the eurozone is still well above the ECB’s 2% target.
More hikes to come?
On May 10, it was reported via Bloomberg that some ECB officials see the need for a September rate hike to bring inflation under control. Christine Lagarde has also given fuel to this view by saying that significant upside risks to inflation exist. It seems that the ECB has not quite reached its “peak” in rates, and STIR markets, are pricing in at least one more rate hike. As always, inflation data will be crucial for the path of ECB rates. Since May, there has been some falling inflation data in the eurozone but core inflation remains stubbornly high. The markets are factoring in two more rate hikes to come. See the ECB’s press conference and statement here.
Bank of Canada, Governor Tiff Macklem, 4.50%, Meets June 7
BoC holds rates as expected at 4.50%
Going into the last Bank of Canada meeting, it was not expected to be eventful. The Bank of Canada had already indicated it would be holding rates at 4.50%, and there was no significant data prior to the meeting to indicate a shift from that strategy. The meeting was as expected with a few takeaways to note. The key point is, unsurprisingly, how the BoC is viewing its battle against inflation.
Inflation
The Governing Council notes recent indications that inflation is falling, and it expects inflation to fall to around 3% by this summer. However, the BoC recognized that core inflation around the world remains stubbornly high and that services in particular are showing inflationary pressures. This is due to the fact that the service rebound post-Covid is still working its way through global economies. During Covid, people wanted manufactured products. Post-Covid, people want to use the services previously denied to them. Core inflation and headline inflation are continuing to fall, and both fell lower in the latest data from March. The core inflation print showed the lowest reading since January 2022.
What to look for going forward
As before, Canadian jobs data will continue to be important as the BoC noted that the labor market remains very tight. For central bankers, when they are setting policy, high employment means inflation pressure. Inflation of course, will be important. Both the headline and core inflation continue to move lower step by step from last summer’s peak. The key tradable opportunities, therefore, will 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 remains within a 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, despite recent price action. For next week’s meeting on Wednesday, the BoC is expected to keep rates on hold again. Read the BoC’s full statement here.
Federal Reserve, Chair: Jerome Powell, 5.125%. Meets 14 June
The end of the hiking cycle
In May’s meeting, the Fed hiked by 25bps as expected but then strongly hinted at a rate pause as the Fed moves to a meeting-by-meeting basis. The statement affirmed this by removing any language suggesting future policy tightening. Although the Fed noted that the banking sector has improved, there is uncertainty among investors about the mild recession projected by the Fed. Additionally, achieving the 2% inflation target will not be an easy process even if rates are restrictive enough. So, what should investors expect next for the markets?
Inflation data is still important
The Fed is committed to reducing inflation to 2%, which means incoming inflation data remains critical. If the data shows much higher inflation than expected, the market may anticipate another rate hike.
Labor data is still important
Powell is particularly concerned about the tight labor market, making US job data an important factor to focus on. Any indication of a drop in the job market will be taken as a signal that the Fed’s rate hikes have worked. This is because of a phenomenon called the Phillips Curve, and a tight job market is assumed to be inflationary, as workers can command higher wages and have greater spending power (which can keep inflation going).
The road ahead
Looking ahead, inflation, labor, and regional US banking news will remain crucial for the Fed’s decision-making process. The Fed has now paused and moved to a meeting-by-meeting basis, but investors will keep a close eye on these three factors to anticipate the Fed’s next move. So, an unwinding of USD strength is not unreasonable as long as the slowdown is not too abrupt, as that would prompt inflows into the USD on risk aversion. See May’s statement here and below.
Bank of England, Governor Andrew Bailey, 4.50%, Meets June 22
Inflation worries vs growth concerns
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 May, the BoE raised interest rates by 25 bps with a 7-2 vote split, which was widely expected. The bank’s future course of action will depend on incoming inflation data.
The Bank of England has indicated that CPI inflation is expected to drop sharply from April’s print due to “base effects,” which refer to the impact of changes in the base period used for comparison. In addition, the extension of the Energy Price Guarantee and falls in wholesale energy prices should also lower the input of household energy bills into CPI inflation. The next UK inflation data release will be crucial in setting expectations for the Bank of England’s next rate hike. If inflation remains high, it could lead to an increase in GBP buying, while a sharp drop-off in inflation could lead to a decrease in interest rate expectations and embolden GBP sellers.
According to Bloomberg, the full impact of the Bank of England’s interest rate hikes has yet to be felt in the UK mortgage market. This could result in a cost of living crisis for some people as they renew their mortgages at higher rates. As a result, some analysts are concerned about the GBP’s upside potential in the near future. Over the past seven months, the GBP has gained in six of them, but moving forward, it may be vulnerable to bad news.
In terms of the meeting on June 22, Reuter’s poll on May 31 has 48/50 economics seeing the BoE hiking rates by 25bps to 4.75% vs 4.50% on May 5th. The same poll now has economists projecting a 5% peak in 2023 but notes that markets see the peak higher, at 5.34% by year-end. Read the full BoC statement here.
Swiss National Bank, Chair: Thomas Jordan, 1.50%, Meets June 22
In March’s meeting, the Swiss National Bank hiked rates by 50bps as expected to bring interest rates in Switzerland up to 1.50%. The SNB, like central banks around the world, has been responding to an uptick in its domestic inflationary pressures. The February headline inflation print for Switzerland is at 3.4% for February and is moving back up to the August peak of 3.5%. However, March’s print is now moving back down again with a 2.9% print, which was further supported by a fall to 2.6% in March.
However, the March reading for the core inflation rate showed an uptick to 2.2%, which is above the high summer reading of 2%, and was affirmed by April’s reading of 2.2% as well. On balance, there is nothing happening in Switzerland that is very different from the rest of the world with headline inflation falling but the core remaining stickier.
The takeaway
The SNB is expected to hike rates by 25bps at the next interest rate meeting to 1.75%, and the terminal rate is currently seen at 1.96%. There is not a lot to focus on for the CHF apart from any surprise moves in inflation, which will likely impact interest rate expectations. Read the SNB’s full statement here.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets 15 June
BoJ fails to live up to yield curve 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 in April this year when Kuroda retires and Kazoo Ueda leads the BoJ. Governor Kuroda has kept the yield control in place but he has now left office. 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. To underscore the point, BoJ’s Kuroda said it is premature to debate the specifics of any exit from monetary easing; the policy rate and balance sheet are the main things to consider when the debate begins. The exit should only be considered when the 2% inflation target is sustainably achieved. Most analysts still expect the BoJ to exit its ultra-loose monetary policy. If and when, they do expect the JPY to strengthen.
No exit surprise expected from BoJ
The BoJ has maintained its current stance and still remains committed to ultra-loose monetary policy. In its April meeting, it delivered no surprises. 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 has kept monetary policy on hold. Market speculation is that, eventually, the BoJ will need to alter this. If and when it does, watch the JPY for strength. IMF Chief Economist Gourinchas said this week that “it’s too early for the BoJ to tighten monetary policy” but added BoJ must stand ready to tighten if inflation remains too elevated. Read the full BoJ statement here.
Reserve Bank of New Zealand, Governor Adrian Orr, 5.50%, Meets 12 July
Mission accomplished?
During its meeting on May 24, the Reserve Bank of New Zealand increased interest rates by 25 basis points to reach 5.50%. While emphasizing 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.
Inflation projection
According to the RBNZ, inflation is anticipated to decline from its peak but 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.
Declining Demand
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.
Outlook for AUDNZD
The divergence in interest rate paths between the RBNZ and the RBA led to a significant upward movement in the AUDNZD currency pair on the decision. By analyzing the overlay of Australian and New Zealand bond yield spreads it is evident that rate investors’ initial reaction is that they are seeing a shift in the future rate paths of the RBA and the RBNZ. As long as the yield spread continues to rise, this development is expected to support the AUDNZD prompting buyers to enter during price dips. It is important to monitor incoming New Zealand inflation data as an upside surprise could potentially force the RBNZ to raise rates again. This is a key risk to its last rate outlook. Look at the bond yield spread for signs of whether or not the AUDNZD has more ongoing upside to come as a rising yield spread should support the AUDNZD buyers. Also, the RBA meets on June 6, so that is obviously a key risk too. Read the RBNZ statement here.
