Central banks and interest rates make the forex world go ’round, so if you’ve been falling behind on what the central banks have been up to lately, then I suggest that you invest some time on my central bank roundup for the SNB, BOJ, RBA and BOE.
On June 18, the SNB decided to keep the interest rate on sight deposits at -0.75%. In the SNB’s monetary policy assessment, the central bank explained that “Negative interest rates in Switzerland make holding investments in Swiss francs less attractive and will help to weaken the Swiss franc over time” since the “Swiss franc is significantly overvalued.”
To newbies out there, Switzerland’s export-driven economy has been getting hammered by less competitive exports and cheaper imports brought about by an appreciating Swissy versus the euro when the SNB floor on EUR/CHF at 1.2000 was removed back in January 15.
Moving on, the central bank also bluntly and explicitly stated that it is prepared to “remain active in the foreign exchange market, as necessary, in order to influence monetary conditions.” Yup, you read that right; the SNB is ready and willing to manipulate the markets in order to weaken the Swissy. Yikes!
On June 19, the BOJ decided to maintain the current monetary policy of increasing the monetary base at an annual pace of 80 trillion yen and keeping interest rates at around zero percent. Once again, BOJ Governor Kuroda and BOJ Board Member Kiuchi were pretty optimistic on the Japanese economy, and their optimism appears to be well-founded since the most recent economic data points from Japan are quite promising.
Also on June 19, the BOJ released a new framework for policy meetings. The most pertinent changes include reducing the frequency of policy meetings from 14 times a year to 8 times a year and increasing the frequency of the outlook report from a semiannual basis to a quarterly basis. All changes will take effect on January 2016.
Aside from that, Governor Kuroda, in a June 10 speech to parliament, remarked that the yen “is unlikely to weaken further in real effective terms.” This caused the yen to spiked hard to the upside and caused some economists to believe that the BOJ will hold off on further easing policies, although Governor Kuroda reiterated his mantra that the BOJ “will continue with QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.”
After cutting rates from 2.25% to 2.00% back in May, the RBA decided to keep the current rates on hold this month with signs that the economy is stabilizing and starting to grow (likely on improving credit and lending conditions), albeit at a pace below its historical rate.
But the central bank did hint that that it will keep rates low for a while, with the primary reasons for an accommodative monetary policy being (1) “weakness in business capital expenditure in both the mining and non-mining sectors,” (2) subdued public spending, (3) spare capacity in the economy, and (4) “slow growth in labour costs.”
In a June 10 speech, RBA Governor Glenn Stevens reiterated the above concerns, adding that “we remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth.” So there you have it! The RBA is ready to cut rates further if needed.
On June 17, the BOE voted 9-0 to hold the bank rate at 0.50% and asset purchases at £375B per month. A closer look at the MPC meeting minutes shows that the BOE’s economic outlook has “not changed materially” since the May Inflation Report, and that the “Bank Rate was expected to remain below average historical levels for some time to come.” The central bank then stressed that “The Committee’s guidance on the likely pace and extent of interest rate rises was an expectation, not a promise.”
The BOE also warned of possible spillover risks from the global normalization of monetary policy, but the BOE was quick to add that “the path for UK monetary policy would depend on the prospects for inflation in the United Kingdom and would not be determined by the actions of other central banks.”