We’re only eight days into the month and already THREE major central banks have shared their latest monetary policy decisions.
What did the RBA, BOC, and ECB have to say and how did their announcements affect their respective currencies? Here’s a short recap:
Reserve Bank of Australia (RBA)
As expected, the RBA kept its interest rates steady at 1.50% for the 13th consecutive month in September.
Upbeat economic outlook
Philip Lowe and his team mostly maintained their optimistic outlook, saying that they still expect the economy to “gradually pick up over the coming year.”
The central bank also retained its belief that “the decline in mining investment will soon run its course” and that “housing prices have been rising briskly in some markets, although there are signs that conditions are easing.”
RBA spent a bit of time talking about employment. Though it removed the sentence “One source of uncertainty for the domestic economy is the outlook for consumption,” it also maintained that wage growth will likely stay low “for a while yet.” However, the bank also qualified that “stronger conditions in the labour market should see some lift in wages growth over time.”
RBA is still NOT happy over AUD’s strength
Lowe and his gang didn’t pass up the opportunity to jawbone the currency. It kept its sentiment that:
“The Australian dollar has appreciated over recent months, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to the subdued price pressures in the economy.
It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
No change = no reaction
Not a lot of changes in the RBA’s sentiments from a month earlier, which is why the Aussie also barely reacted to the release.
Bank of Canada (BOC)
BOC was #ReadyForIt again
BOC once again proved that it’s dancing to its own beat as it surprised the markets with another rate hike this week.
If you recall, Governor Stephen Poloz and his team raised their rates for the first time in SEVEN years in July despite market concerns that Canada’s inflation rate is too low. BOC shrugged off weak inflation as “temporary,” however, and raised its rates anyway due to the “lag between monetary policy actions and future inflation.”
While there were signs that Poloz and his friends would raise rates again, the combination of their tight-lippedness (is this even a word) since the July announcement and the fact that no presser is scheduled led analysts to believe that BOC members will pull the trigger in October instead. But it seems like Poloz and his friends were #ReadyForIt again this month!
Generally positive outlook
In its statement the BOC repeated that “removal of some of the considerable monetary policy stimulus in place is warranted” thanks to Canada’s growth that’s “becoming more broadly-based and self-sustaining.”The central bank cited a robust consumer spending; strong business investment and exports, and a cooling housing sector that all contribute to a “level of GDP is now higher than the Bank had expected.”
It also repeated its lack of concern over weak inflation, saying that “it has evolved largely as expected in July” and that the increase in its core inflation measures reflect the “dissipating negative impact of temporary price shocks and the absorption of economic slack.”
It’s not all rainbow bagels and millennial pink chocolates though. BOC members still believe that “significant geopolitical risks and uncertainties around international trade and fiscal policies remain,” and that excess capacity in the labour market persist with “wage and price pressures are still more subdued than historical relationships would suggest.”
CAD spiked higher
BOC ended its statement with a warning that (emphasis mine):
“Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation.
Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.”
Fortunately for Loonie bulls, the surprise rate hike was more than enough to push the comdoll higher across the board.
European Central Bank (ECB)
As expected, the ECB made no changes to its policies in August. Heck, it didn’t even change anything from its July statement except for the date! Meanwhile, Draghi’s presser was a mix of balanced outlook and vague future path for policy.
No changes to existing policies
The ECB’s refinancing rate is still at 0.00%; the marginal lending rate at 0.25%, and the deposit rate is at -0.40%.
The QE program will also maintain its monthly pace of €60 billion “until the end of December 2017, or beyond, if necessary.” More importantly, the ECB’s bias is still on when it repeated that:
“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.”
This caused bad moments for traders who were hoping that Super Mario and his team would start tapering in September.
Revised growth and inflation forecasts
As expected, ECB’s staff revised their growth estimates higher. Growth for 2017 is now projected at 2.2% (up from 1.9%) while 2018 and 2019’s rates were maintained at 1.8% and 1.7% respectively.
Medium-term inflation was revised lower though. 2017 HICP is still seen at 1.5% but 2018’s growth is now at 1.2% (down from 1.3%) and 1.5% in 2019 (down from 1.6%).
Draghi noted “broad dissatisfaction” among ECB members over low inflation even as they expect the pace to eventually return to just below their 2.0% target. He pointed to the “appreciation of the exchange rate,” saying that it will be considered in their future policy decisions.
Strong EUR not a big deal
Remember that a lot of market players expected the ECB head honcho to talk down the euro after it made solid gains in the past weeks.
But while Draghi admitted that the euro’s appreciation has made financial conditions “unquestionably” tighter and that its volatility is a “source of uncertainty” for the central bank’s growth and inflation outlook, he also emphasized that exchange rate “is not a policy target.”
So while the ECB is not targeting a specific exchange rate or range it also takes the euro’s levels into consideration when making its next decisions.
Big decisions in October?
Back in July Draghi hinted that he and his homies will likely discuss tapering “in the Autumn,” which many took to mean “in September.” Hopes were tempered a few days ago when unnamed sources suggested that policymakers will only start making changes in December.
But in his presser, Draghi shared that “This autumn, we will decide on the calibration of our policy instruments beyond the end of the year.”
He admitted that they’ve started preliminary discussions regarding QE but that “the bulk of these decisions will be taken in October.” This was welcome news to traders who thought they won’t see any action until December.
Topsy-turvy price action for the euro
The common currency fell when traders saw that the ECB maintained its easing bias, but soon popped higher when Draghi didn’t sound too concerned over a strong euro.
The cherry on top of the bulls’ sundae was the possibility that we could see policy changes from the central bank as early as next month. The euro gave up some of its intraday gains but ended the day higher across the board.