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It’s time for part 2 of my two-part series on the latest central bank biases. This time, we’ll be discussing the BOC, the RBA, the RBNZ, and the BOJ.

Bank of Canada (BOC)

Bank of Canada (BOC)

  • Overnight Rate remains at 1.25% in May
  • Overall, BOC still has a tightening bias
  • BOC Governor Poloz concerned about trade and housing market
  • Even so, Poloz thinks economy is evolving as expected
  • Poloz concludes that economic situation “will warrant higher interest rates
  • However, Poloz stressed that tightening would be a “gradual process

The BOC’s last monetary policy statement was actually way back on May 30.  And back then the BOC announced that the Overnight Rate was unchanged at 1.25%.

The BOC still has a hiking bias, though. Moreover, the BOC changed the language in its official press statement to sound even more hawkish.

And for comparison purposes, this is the BOC’s forward guidance during the April 18 BOC statement (emphasis mine).

“Some progress has been made on the key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth. This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”

Now here’s the BOC’s forward guidance during the May 30 BOC statement (emphasis mine).

Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data.”

BOC Governor Stephen Poloz did dial down some of the BOC’s hawkishness and tried to present a more neutral tone during a June 27 speech, though.

As for specifics, Poloz had these to say (emphasis mine):

[T]hese days there is a litany of things we simply do not know. These include the degree to which uncertainty about trade policy is holding back business investment, how new guidelines for mortgage lending are affecting the housing market, and how sensitive the economy is to higher interest rates given the accumulation of household debt.”

This is why we say that the Bank is particularly data-dependent right now. Providing routine forward guidance in such a setting would not, in my view, enhance our credibility. Rather, it would put it at risk.”

“Today, as we approach our next interest rate decision, we are working to incorporate in our projections the effects of the recently announced US steel and aluminum tariffs, along with retaliatory measures, both in Canada and globally. We are also analyzing individual-level data to understand how the new lending guidelines in Canada are affecting the housing market and mortgage renewals. We expect these issues to figure prominently in our upcoming deliberations.”

Despite his cautious tone, Poloz did appear to be more hawkish during the Q&A portion that followed.

For instance, Poloz was asked about the negative effects of a trade war and he merely said that:

“The economy probably would slow but inflation is more likely to rise.”

Poloz was also asked about the recent evolution of the Canadian economy and he said that:

“It might be worth reminding you that data point for the first quarter, was exactly, to the decimal point, exactly what we forecast in the April MPR (Monetary Policy Report), which is quite reassuring in the sense that underlying appears to be correct. And inflation is exactly on target as we expected.”

In other words, the Canadian economy is evolving within the BOC’s expectations. And to drive home his hawkish message, Poloz even later said that:

“Given where the economy is we are in a situation where the economy will warrant higher interest rates. We will ensure that is a gradual process.”

Reserve Bank of Australia (RBA)

Reserve Bank of Australia (RBA)

  • Cash Rate steady at 1.50% in June
  • RBA still saying that a stronger AUD would be problematic
  • RBA still has a hiking bias
  • However, a rate hike “still looks to be some time away

The RBA announced no changes to its monetary policy during the June 5 RBA statement. The Cash Rate therefore still stands at 1.50%.

The RBA also had a generally positive assessment and outlook on the Australian economy. However, the RBA noted that wage growth and inflation both remain lower.

Other than that, the RBA also repeated its warning that:

“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

What’s probably more surprising are the minutes of the June RBA meeting minutes, which were released on June 19.

You see, the RBA removed its hiking-biased forward guidance that:

“[M]embers agreed that it was more likely that the next move in the cash rate would be up, rather than down.”

However, it’s likely that the RBA still has a hiking bias because RBA Governor Philip Lowe did say in a June 13 speech that (emphasis mine):

[T]he Australian economy is moving in the right direction. If this continues to be the case, it is likely that the next move in interest rates will be up, not down.

Lowe did give his hawkish message a dovish spin when he was quick to add the following:

“Any increase in interest rates, however, still looks to be some time away.”

“[T]here is not a strong case for a near-term adjustment in monetary policy.”

Reserve Bank of New Zealand (RBNZ)

Reserve Bank of New Zealand (RBNZ)

  • OCR unchanged at 1.75% in June
  • RBNZ clearly has a neutral policy bias
  • RBNZ wants to continue “supportive monetary policy for some time to come
  • Despite neutral policy bias, RBNZ forecasts a rate hike by Q3 2019

The RBNZ announced during the June 27 RBNZ statement that the Official Cash Rate (OCR) is unchanged yet again at 1.75%.

The RBNZ noted that New Zealand’s economy is evolving mostly within expectations. Although the RBNZ did express some concern with GDP growth and fiscal policy when it noted that:

“[T]he recent weaker GDP outturn implies marginally more spare capacity in the economy than we anticipated. The Government’s projected spending impulse is also slightly lower and later than anticipated.”

Moreover, inflation is still below the bank’s 2.0% target, “necessitating continued supportive monetary policy for some time to come.”

Other than that, the RBNZ also stated that it has a neutral monetary policy bias when it noted that:

“[The RBNZ is] well positioned to manage change in either direction – up or down – as necessary.”

This is not a new development since the RBNZ already communicated its shift from a tightening bias to a more neutral policy bias during the May RBNZ Monetary Policy Statement when the RBNZ stated back then that:

“The direction of our next move is equally balanced, up or down. Only time and events will tell.”

Before the May RBNZ statmement, the RBNZ always had a tightening bias. The RBNZ just thinks that the time is not right to hike since it constantly warned that:

“A premature tightening would risk undermining growth and employment, and could cause inflation to settle below the midpoint of the target range.”

It’s also worth noting that the RBNZ is not keen to cut rates when it noted during the May RBNZ statement that:

“A further reduction in the OCR, to return inflation to the target mid-point more quickly, risks creating unnecessary volatility in output, employment, and interest rates.”

Despite the RBNZ’s clearly neutral monetary policy bias, the RBNZ still projects a rate hike by Q3 2019. Admittedly, however, this is a full quarter later compared to the RBNZ’s projection during the February RBNZ Monetary Policy Statement. Still, it does imply that the OCR is more likely to go up than down.

Bank of Japan (BOJ)

Bank of Japan (BoJ)

  • BOJ announced no changes to monetary policy
  • Overnight call rate still at -0.10%
  • “QQE With Yield Curve Control” framework still in place
  • No plans yet for exiting ultra-loose monetary policy

As usual, the BOJ announced no changes to its monetary policy during the June 15 BOJ statement.

The overnight call rate is therefore still at -0.10% while purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) will continue so that their amounts outstanding will increase at an annual pace of about ¥6 trillion and about ¥90 billion respectively.

The BOJ’s so-called “QQE With Yield Curve Control” framework is also still in place, so the BOJ will continue to buy up 10-year Japanese Government Bonds (JGBs) as needed in order to keep bond yields at around 0%.

There’s no limit on the purchase amount, but the BOJ did reiterate that it will “conduct purchases at more or less the current pace – an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen.”

Also as usual, the BOJ didn’t give any forward guidance on when it plans to exit its ultra-loose monetary policy.

BOJ Governor Haruhiko Kuroda was asked about the BOJ’s plans for exiting its current monetary during the post-statement presser.

And Kuroda basically said that monetary policy isn’t going to change anytime soon when he said that:

“It’s premature to talk about specific means and procedures for an exit. What’s important now is to do our best to achieve 2 percent inflation. When the appropriate time comes, the BOJ is ready to offer appropriate communication to markets”

And according to Kuroda, the BOJ’s monetary policy will remain accommodative because inflation is still weak. And inflation is weak, in turn, because of weak wage growth due to the stubbornly persistent deflationary mindset in Japan.

To quote Kuroda directly:

“[T]here are factors unique to Japan that are weighing on inflation. That’s the deflationary mindset of households and companies, which became entrenched due to 15 years of deflation.”

“Short-term inflation expectations tend to move in response to underlying price moves. But medium- and long-term inflation expectations aren’t rising much. That’s due to Japan’s deflationary mindset.””

The BOJ’s Summary of Opinions of the June meeting also reinforced the idea that the BOJ’s monetary policy won’t be changing for a long time since BOJ members opined that “the Bank should persistently continue with powerful monetary easing in a sustainable manner.”