Summary analysis of the major central banks’ position

Central banks around the world are increasingly finding that peak rates are approaching. The RBNZ has officially paused rates, the ECB may hold in September alongside the Federal Reserve, and even expectations for a Bank of England peak rate of 6% have moderated over the last month. Slowing economic data across the US and Europe, as well as China growth worries, have all resulted in a strong bid coming back into bonds. This, in turn, is naturally reflected by lower interest rate expectations across the world. Have a look at this month’s rundown and see a summary of each individual central bank, as well as a link to the official rate statement at the bottom of each piece.

Reserve Bank of Australia

  • Governor Phillip Lowe
  • Cash rate at 4.10%
  • Next meeting on 5 September

RBA exercising patience as it tackles prolonged inflation

Ahead of the most recent RBA meeting, we discussed the possibility of a downward shift in AUDNZD due to a dovish surprise from the RBA. The market was divided 50/50 on whether the RBA would raise rates, but it ultimately chose to keep rates steady at 4.10%. Nonetheless, the primary focus was always going to be on the forward guidance provided by the RBA and its impact on short-term interest rate markets.

The implications of the decision to pause

While the RBA decided to keep rates unchanged, it still indicated its intention to implement further rate hikes. The crux of this meeting lay in the signalling of future rates rather than the actual decision itself. When examining short-term interest rate markets immediately after the decision, rate expectations remained largely unchanged over a longer timeframe. The projected terminal stood at 4.62%, only slightly higher than the previous expectation of 4.54%. The RBA acknowledged that “the balance of risks on inflation had shifted to the upside compared with a month earlier.” However, it also believes that inflation has peaked and is projected to return to the target range by mid-2025. The latest Monthly CPI indicator was lower for July than markets were expecting, so this has taken the pressure off the RBA and the terminal rate is now down to 4.16%.

Exercising patience

In their recent statement, the RBA chose to pause on rates due partly to the view that inflation would take longer than anticipated to reach the target range. It opted for a cautious approach, seeking to monitor economic data to safeguard the progress made in employment. Australia currently boasts historically low unemployment rates and the RBA aims to avoid unnecessary damage to the labour market. Simultaneously, it acknowledged the risks of inflation becoming entrenched in higher wages.

What to monitor moving forward

AUD traders should closely monitor two key releases: labour data and inflation data. If these figures surprise on the upside, particularly inflation data, it is likely that the AUD will strengthen against the NZD once again, driven by heightened rate expectations from the RBA. AUD traders should also look at the next RBA meeting carefully on September 5.

 RBA statement

 

European Central Bank

  • President Christine Lagarde
  • Cash rate at 3.75%
  • Next meeting on 14 September

Another central bank moving to data dependence

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. Despite increased inflation expectations and lowered GDP projections, the ECB aims to maintain a flexible and data-driven approach.
During July’s rate decision, the European Central Bank (ECB) reached a unanimous agreement. Notably, Christine Lagarde said in the press conference that the wording changes in the statement were purposeful and significant, aimed at conveying specific messages rather than being arbitrary or inconsequential.

The ECB highlighted the importance of data assessment in determining the extent of their future actions, emphasising that it is not bound by forward guidance. It explained that the recent cut in the minimum reserve remuneration rate does not impact their overall policy stance. When Lagarde was asked about the possibility of pausing rate hikes, she clarified that the ECB is moving towards a stage where its decisions will be data-dependent. The ECB will take into account staff projections and additional data to make informed decisions about either continuing rate hikes or pausing. It stressed that if it decided to pause, it would definitely not result in a rate cut. While a pause may not be extended indefinitely, the decision will be grounded in the data available.

Regarding inflation, the ECB acknowledged the role of wage increases in driving it upward. However, it assured that it has not observed any second-round effects at the moment. The Governing Council has endorsed this perspective. It will be interesting to see how this develops as the core reading remains ‘stickier’ in the Eurozone.

Overall, the ECB’s stance is firmly anchored in data analysis, signalling a cautious approach to future policy decisions based on evolving economic conditions and inflation dynamics.

The more cautious tone from the ECB is undoubtedly due to the weak PMIs prior to the last ECB meeting on August 23. Recent pricing now sees the ECB staying on hold for September 14 and there is a 75% of no change in the ECB rate.

ECB statement

 

Bank of Canada

  • Governor Tiff Macklem
  • Cash rate at 5.00%
  • Next meeting on 6 September

Inflation worries persist

Although headline inflation was at 3.3% in July, the BoC is concerned that inflationary pressures could easily re-emerge if rates are not restrictive enough to dampen demand.

The fear about returning inflation prompted the BoC to hike rates again in July’s meeting bringing the Bank of Canada to have made two back-to-back hikes now in June and July’s meeting. With successive increases in policy rates in June and July having occurred, there is now cautious optimism from the BoC that inflation will gradually return to the 2% target. However, the inflation forecasts for 2024 and 2025 were both revised higher. Let’s explore key highlights from the BoC’s discussions.

By taking action now, and implementing higher interest rates, the BoC aims to prevent more drastic measures in the future. Despite some signs of easing, the labour market remains tight, presenting a continued challenge for policymakers. Striking the right balance is crucial as a strong labor market can contribute to inflationary pressures. Look at the latest labour data showing strong employment numbers for CAD

Balancing risks

Central banks, including the BoC, are mindful of the risks associated with both under- and over-tightening monetary policy. It aims to find an equilibrium that brings inflation back to the desired target level without hindering economic growth. The BoC’s decision to raise rates reflects its acknowledgement of persistent excess demand and underlying inflationary pressures. The governing councils consider that a more restrictive policy stance is necessary to steer inflation towards the 2% target. While the possibility of keeping rates unchanged was discussed, the councils weighed the costs of delay against the benefits of waiting, ultimately leaning towards proactive action.

What to look for going forward

As before, Canadian jobs data will remain important as the BoC noted that the labour market remains very tight. For central bankers, when it is setting policy, high employment means inflation pressure. Inflation, of course, will be important. The key tradable opportunities 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. 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.

BoC statement

 

Federal Reserve

  • Chair Jerome Powell
  • Cash rate at 5.375%
  • Next meeting on 20 September

The last rate hike?

Although June’s meeting was seen as broadly more hawkish, we noted that Chair Powell emphasised that projections are not set in stone, and decisions will be made on a meeting-by-meeting basis moving forward.  We noted in June that 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. So, the weaker June CPI print released on July 12 was just the sort of print the Fed would want to see.

The recent July Fed meeting went as expected with the lower-than-anticipated June CPI data giving the Fed hope for a potential path back to 2% inflation. Since then, the PCE print was 3.3% for July, Core PCE was 4.2% and that is broadly still moving lower.

The confidence derived from inflation data before the last meeting led the Fed to refrain from definitively signalling a rate hike for September. Fed Chair Jerome Powell mentioned that a September hike is possible, but it will depend on the upcoming data. In June’s dot plot, Powell had explicitly mentioned the possibility of two more rate hikes. However, the recent 25 bps hike did not come with a clear signal for another one, causing an immediate downward reaction in the USD. This implies that the market now sees the Fed as being more “data dependent” in their approach. Current expectations see an 89% chance of a Fed pause in rates for September.

What to watch now moving forward

Looking ahead, incoming inflation data holds significant importance for the Fed. If inflation continues to decrease, it will increase confidence in the market that the Fed has reached its peak terminal rate. In terms of intraday trading expectations:

  • Lower-than-expected inflation prints typically lead to: Lower USD, lower US10Y yields, higher US stocks, and higher gold prices.
  • Higher-than-expected inflation prints typically lead to: Higher USD, higher US10Y yields, lower US stocks, and lower gold prices.

On top of this, strong domestic data could lead to USD strength on expectations that higher-than-expected growth could boost inflation.

Fed statement

 

Bank of England

  • Governor Andrew Bailey
  • Cash rate at 5.25%
  • Next meeting on 21 September

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 August, the Bank of England raised interest rates by 25 bps. The stakes have never been higher for Bank of England policymakers. July’s core inflation has stayed sticky at 6.9%; triple the Bank of England’s target rate of 2%. With millions of UK homeowners now moving onto higher mortgage rates, the hit in income will start to affect both UK households and the UK housing market. The weaker-than-expected retail sales on August 18 and the PMI miss on Aug 23 further added to weak growth prospects.

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, short-term interest rate markets now see a terminal rate of around 5.75% which is 25 bps lower than recent expectations of a 6% terminal rate from the BoE. Stretched GBP longs now look very vulnerable to sellers.

BoE statement

 

Swiss National Bank

  • Chair Thomas Jordan
  • Cash rate at 1.75%
  • Next meeting 21 September

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 now expected to result in a 25 bps hike to 2.00%. Short-term interest rate markets anticipate a terminal rate of 1.85%, 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. CHF traders, stay alert to incoming inflation data. The current inflation level is now within the SNB’s target so further CHF gains look limited from here:

 SNB statement

 

Bank of Japan

  • Governor Kazuo Ueda
  • Cash rate at -0.10%
  • Next meeting on 22 September

BoJ finally adjusts its yield curve control program

At the end of last year, the BoJ first unexpectedly tweaked the Yield Curve Control band to +/- 0.50% 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, since then, speculation has continually grown that this was the start of the BoJ exiting their ultra-loose monetary policy.

Since that time, inflation in Japan has been steadily moving higher and inflationary pressures are now being recognised by the BoJ. In the July meeting, the BoJ revised inflation forecasts to 2.5% from 1.8% for 2023 but did cut the 2024 forecast to 1.9% from 2%.

Finally, the BoJ adjusts its Yield Curve Control Policy

The decision was reached by an 8-1 vote, with Nakamura being the sole dissenter on Yield Curve Control (YCC). The BOJ believes it is appropriate to enhance the sustainability of its monetary easing measures. To achieve this, the BOJ plans to operate yield curve control more flexibly, enabling it to respond swiftly to both upside and downside risks in the economy. The uncertainty surrounding Japan’s economic outlook and prices is deemed to be extremely high.

During their assessment, the BOJ found that Japan’s consumer inflation has exceeded the projections made in the April outlook. Consequently, the BOJ has decided to conduct fixed-rate unlimited buying for 10-year Japanese Government Bonds (JGBs) for a second time today.

Additionally, the BOJ has expanded the range of 5-year to 10-year JGB purchases from JPY 875 billion to JPY 900 billion. Furthermore, it has widened the range of 3-year to 5-year JGB purchases from JPY 725 billion to JPY 750 billion. These adjustments in bond purchases aim to address the evolving economic conditions and support their monetary policy objectives. So, although the Bank of Japan is keeping rates negative at -0.10% it will allow the YCC more flexibility by purchasing JGBs at a rate of 1.0% (vs. prior of 0.5%).

 BoJ statement

 

Reserve Bank of New Zealand

  • Governor Adrian Orr
  • Cash rate at 5.50%
  • Next meeting on 4 October

Higher rates for lower reaffirmed

As the Reserve Bank of New Zealand (RBNZ) convened for its latest meeting, market expectations did not anticipate any adjustments to interest rates. True to predictions, the RBNZ maintained the current rates at 5.5%, and minimal changes were observed compared to the preceding meeting. However, the RBNZ placed notable emphasis on the potential near-term risk associated with inflation measures not slowing down as anticipated. In reaffirming their stance, the committee echoed the need for the official cash rate to remain restrictive in the foreseeable future, reiterating language from their previous statement.

Extended duration of higher interest rates

The RBNZ acknowledged the expectation of slightly elevated inflationary pressures in the upcoming years. Consequently, the possibility of interest rates remaining at their current levels for an extended period emerged as a strategy to temper demand amidst “stickier inflation.” See the impact on market expectations in the week of the decision, as interest rates were expected to be firmer for longer.

Inflation trends and Governor Orr’s insights

Regarding inflation, the RBNZ noted a decrease from 6.7% to 6.0% in annual consumer price inflation during the June 2023 quarter. Despite this moderation, the RBNZ emphasised that achieving the mid-point of the 1 to 3% target range for inflation would require some time.

In the press conference, Governor Orr expressed contentment with the official cash rate’s current position. He clarified that the nominal neutral cash rate’s incremental increase by 25bps should not be interpreted as forward guidance or a strong indicator of the RBNZ’s imminent actions. Governor Orr downplayed discussions about a rate cut and assured the readiness of the RBNZ to navigate through data uncertainties in the short term.

Market reaction and currency impact

The initial response witnessed the New Zealand Dollar (NZD) strengthening against the Australian Dollar (AUD), leading to a decline in the AUDNZD pair. This reaction aligns with the “higher for longer” narrative and propelled AUDNZD towards a crucial support level at 1.0800, which coincides with the 50% Fibonacci retracement from the May to June swing. While the meeting resulted in few notable changes, key daily support, resistance, and Fibonacci levels to monitor in the AUDNZD pair are highlighted below:

RBNZ statement