This week we had not one, but TWO central banks printed their policy decisions for the month of August.
What did the RBA and BOE have to say anyway? Here are key takeaways from their announcements:
Reserve Bank of Australia (RBA)
As expected, the RBA kept its interest rates at 1.5% and shared that its forecasts for the economy are “largely unchanged.”
Generally upbeat outlook
The central bank maintained that the economy will grow by an annual rate of 3.0% over the next couple of years. However, the RBA also expressed its concern over consumption, saying that “slow growth in real wages and high levels of household debt are likely to constrain growth in spending.”
It’s also pretty chill over inflation, saying that recent reports are “broadly as the Bank expected.” For now, the deflationary effect of discounting due to increased retail competition is being offset by higher tobacco and utilities prices.
The RBA had mixed feelings about the housing market, though. While the central bank thinks that high prices are starting to ease, it also revealed that “considerable additional supply of apartments is scheduled to come on stream over the next couple of years.”
Unfortunately, it also remarked that “[g]rowth in housing debt has been outpacing the slow growth in household incomes.”
RBA REALLY doesn’t like a strong AUD
Lowe and his team didn’t pass up the opportunity to jawbone the currency. Not only does the RBA believe that a strong currency is expected to “contribute to subdued price pressures in the economy,” but it also remarked that “an appreciating exchange rate would…result in a slower pick-up in economic activity and inflation than currently forecast.” Yikes!
Aussie bears pounced
While we’ve already heard that Governor Philip Lowe preferred a weaker currency, the RBA’s announcement still dragged the Aussie lower across the board.
August statement on monetary policy
The RBA provided more deets in its quarterly statement on monetary policy released earlier today.
In it the central bank downgraded its growth forecasts for 2017 partly due to “temporary factors.” Meanwhile, it core inflation forecasts haven’t changed though the trajectory has shifted higher due to higher commodity prices.
The RBA also echoed its concerns over low wage growth, saying that “Some households may feel constrained from spending more out of their current incomes because of high levels of household debt.”
Last but the least, the central bank repeated its concerns over a strong currency and hinted that it would factor in the board’s future decisions. Yipes!
Bank of England (BOE)
Market players were expecting volatile price action during the BOE’s “Super Thursday” and the central bank sure didn’t disappoint!
Policies are left unchanged
Much like the RBA, the BOE kept its monetary policies unchanged for another month. Interest rates is till at 0.25% after a 6-2 vote while its QE program is maintained thanks to a unanimous decision. The Monetary Policy Committee (MPC) also voted to confirm the end of the Term Funding Scheme’s drawdown period on February 2018.
Remember that the hawk camp lost a supporter after Kristin Forbes voted her last vote last June. Ian McCafferty and Michael Saunders are now the only MPC members voting for a rate hike.
Adjustments to economic forecasts
As expected, the BOE downgraded its growth forecasts and upgraded its inflation estimates.
Mark Carney and his gang cited sluggish growth in the first half of the year a reason for its downgraded growth estimates although it also pointed to the squeeze on the households’ real income – both from a strong currency and Brexit concerns – weighing on consumption.
Meanwhile, inflation is expected to remain above the BOE’s 2.0% target (and even reach 3.0% in October) as the post-Brexit Sterling weakness continues to push domestic prices higher.
However, the BOE also expects inflation to go back down to its target in 2018 thanks in part to the impact of high fuel prices being taken out of the central bank’s comparisons.
Here are the adjustments:
2017 GDP is downgraded from 1.9% to 1.7%
2018 GDP is downgraded from 1.7% to 1.6%
2019 GDP is maintained at 1.8%
Q3 2017 inflation is upgraded from 2.6% to 2.7%
Q3 2018 inflation is maintained at 2.6%
Q3 2019 inflation is maintained at 2.2%
BOE’s projections assume a “smooth” Brexit
One thing we should remember is that the BOE’s estimates currently assume a “smooth” Brexit transition.
The BOE’s inflation report noted that
“…the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union.
The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship”
In his presser, Carney confirmed that, at the moment, the BOE does “not see any material evidence” that businesses “think that the transition would be anything but smooth.”
However, he also added that “the assumption of a smooth transition to a new economic relationship with the EU will be tested.” In fact, he already shared that investment levels in 2020 are already 20% lower than a BOE forecast before the Brexit vote. Yikes!
Rate hike on the horizon?
Remember that the BOE has been shying away from raising its interest rates despite rising consumer prices because it believes that stimulating growth and employment leaves room for inflation overshooting its 2.0% target.
But if the economy performs according to the BOE’s August estimates, the spare capacity is eliminated. This would then give room for the BOE to tighten its policies. The central bank noted that (emphasis mine):
“…given the assumptions underlying its projections including the closure of the drawdown period of the TFS, and allowing for the effects of the recent prudential decisions of the Financial Policy Committee and the Prudential Regulation Authority, some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target.
Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.”
Pound bears attacked
Not even hints of a rate hike down the road were enough to ward off the market bears. One possible reason is that market players don’t agree with the BOE’s assumption of a “smooth” Brexit. Other analysts have also noted that a rate hike some time in 2018 or 2019 is just too far down the road to be priced in for now.
Whichever the case may be, the pound fell across the board and hit significant lows against the dollar and the pound.