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Now that the Fed and the RBNZ have had their say, it’s time for part 2 of my two-part series on the latest central bank biases, with the Fed, the BOC, the RBA, the RBNZ in focus.

U.S. Federal Reserve (Fed)

Federal Reserve (Fed)

  • Fed voted to hike by 25 bps during the September meeting
  • Target range for Fed Funds Rate is now between 2.00%-2.25%
  • Path for the Fed Funds Rate unchanged, so Fed is open to one more hike this year
  • Fed also open to 3 more hikes in 2019 and one more hike in 2020
  • Dot plot shows 12 of the 16 FOMC members are open to at least one more hike this year
  • Fed dropped “accommodative” characterization of its monetary policy

Fed officials voted unanimously in favor of a rate hike during the September 26 FOMC statement, so the target range for the Fed Funds Rate increased by 25 basis points from 1.75%-2.00% to 2.00%-2.25%.

As for the Fed’s projections, the Fed upgraded its GDP growth forecasts for 2018 and 2019 while downgrading its inflation forecast for 2019.

However, the projected path for the Fed’ Funds Rate was unchanged, so the Fed is open to one more hike this year, three hikes next year, and one hike in 2020. The Fed then expects to hold steady in 2021.

And the Fed’s dot plot shows that 12 of the 16 FOMC members are open to one more hike this year, as you can see below.

Source: September 2018 FOMC Meeting Statement
Source: September 2018 FOMC Meeting Statement

The dot plot doesn’t really distinguish between voting and non-voting FOMC members, but since only 4 FOMC members don’t want further hikes, it’s pretty much a given that the majority of voting FOMC members are open to one more hike this year.

Moving on, the Fed also changed its language by dropping the following characterization of its monetary policy:

“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”

This is not all that surprising since the minutes of the August FOMC meeting already gave a heads up.

Fed Chair Powell also tried to downplay the change in language, noting that:

“Readers of the FOMC statement likely noted that the Committee dropped a sentence that indicated that ‘the stance of monetary policy remains accommodative.’ This change does not signal any change in the likely path of policy; instead, it is a sign that policy is proceeding in line with our expectations.”

Bank of Canada (BOC)

Bank of Canada (BOC)

  • BOC announced no changes to its monetary policy
  • BOC still has a hiking bias
  • However, BOC stressed that it would be a “gradual process
  • BOC expressed some concerns about NAFTA
  • But BOC’s Wilkins implied that BOC may continue to hike even if NAFTA deal fails to pan out
  • Wilkins also revealed that BOC members talked about the possibility of hiking more aggressively

The BOC announced no changes to its monetary policy way back on September 5, so the Overnight Rate is unchanged at 1.50%.

The BOC retained its hiking bias, though. In fact, the BOC even changed its language to imply that a rate hike is imminent when it noted that:

“Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target.”

In contrast, this is what the BOC had to say during the July 11 BOC Statement:

“Governing Council expects that higher interest rates will be warranted to keep inflation near target.”

The BOC did imply that it was worried about ongoing NAFTA negotiations when it stated that:

“The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.”

However, BOC Senior Deputy Governor Carolyn Wilkins said during a September 6 speech that:

“[P]rotectionist measures create risks to the upside for inflation, especially when the economy is operating near full capacity. In weighing these trade-offs, you can be sure that Governing Council will not lose sight of our primary mission. Low and stable inflation will help reduce at least one source of uncertainty for companies and households.”

In other words, the BOC will likely continue to hike even if NAFTA talks fail.

Moreover, Wilkins also revealed that:

“Governing Council also discussed whether the gradual approach to raising rates that we have been taking over the past year remains appropriate. It is a natural question to ask, given that the economy has been operating at potential for the past year and it is in this part of the cycle when interest rates typically rise to preempt a buildup in inflation pressures.”

In simpler terms, BOC members talked about potentially hiking at a more aggressive pace to preempt inflation instead of the current “gradual approach.”

Reserve Bank of Australia (RBA)

Reserve Bank of Australia (RBA)

  • RBA announced no changes to its monetary policy
  • RBA still has a hiking bias
  • However, there’s “no strong case” for a near-term hike
  • RBA not too concerned that lenders have been hiking mortgage lending rates
  • RBA comfortable with AUD’s current exchange rate

The RBA announced during the September 4 RBA statement that its monetary policy is unchanged. The Cash Rate is therefore steady at 1.50%.

As for the RBA’s economic assessment and outlook, the RBA still has a generally positive assessment and outlook for the Australian economy. The only cause of concern is domestic consumption since the RBA noted that “Household income has been growing slowly and debt levels are high.”

The RBA tried to give that a positive spin, though, by saying that “The outlook for the labour market remains positive” and that “The improvement in the economy should see some further lift in wages growth over time.”

As for the high debt levels, the RBA announced its monetary policy decision after Westpac hiked rates on variable home loans. And for those who don’t know, Westpac is one of the so-called “Big Four” banks in Australia and was the first of the “Big Four” to hike.

However, the RBA didn’t seem to mind that Westpac hiked rates on variable home loans, noting only that “Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.”

The RBA’s meeting minutes elaborated further, but the message is still the same – the RBA is not too concerned.

“By the time of the September meeting, lenders accounting for around 40 per cent of outstanding housing credit (including one major bank) had announced increases in mortgage lending rates in response to the increase in funding costs. Once they take effect, these increases would imply a small rise in the average outstanding variable housing loan rate, unwinding about half of the decline observed in the average housing loan rate over the preceding year.”

And since the RBA’s outlook for the Australian economy is still generally positive, and since the RBA didn’t mind too much that Australian lenders are hiking mortgage lending rates, the RBA reiterated that it still has a hiking bias:

“[M]embers continued to agree that the next move in the cash rate would more likely be an increase than a decrease.”

But as usual, the RBA cautioned that “there was no strong case for a near-term adjustment in monetary policy.”

As for the Aussie’s exchange rate, the RBA appears content with the current exchange rate since the RBA noted that:

“[T]e Australian dollar had depreciated against the US dollar, and on a trade-weighted basis, but remained within the relatively narrow range of the preceding few years.”

“[T]he modest depreciation of the Australian dollar was helpful for domestic economic growth.”

Reserve Bank of New Zealand (RBNZ)

Reserve Bank of New Zealand (RBNZ)

  • RBNZ maintained its current monetary policy
  • RBNZ “will keep the OCR at an expansionary level for a considerable period
  • RBNZ still has a neutral policy bias
  • Despite neutral policy bias, RBNZ forecasts a rate hike by Q3 2020

The RBNZ announced during the September 26 RBNZ statement that it was maintaining its current monetary policy, so the Official Cash Rate (OCR) is steady at 1.75%.

The RBNZ implied that New Zealand’s economy is evolving within expectations when it noted that the “projection for the New Zealand economy, as detailed in the August Monetary Policy Statement, is little changed.”

The RBNZ did note that GDP growth in Q2 was stronger-than-expected, but the RBNZ played that down by also saying that “downside risks to the growth outlook remain.”

And while the RBNZ happily noted that there are “welcome early signs of core inflation rising towards the mid-point of the target,” the RBNZ lamented that “consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy.”

Speaking of supportive monetary policy, the RBNZ said that it “will keep the OCR at an expansionary level for a considerable period,” adding that it will keep the OCR steady at current levels “through 2019 and into 2020.”

The RBNZ also reiterated that it has a neutral monetary policy bias when it noted that:

“The direction of our next OCR move could be up or down.”

Despite the neutral policy bias, the RBNZ is likely still on track for a potential rate hike by Q3 2020. After all, the RBNZ said that the “projection for the New Zealand economy … is litte changed.”

And the August RBNZ Monetary Policy Statement revealed that the RBNZ expects a rate hike by Q3 2020, as you can see below.

Source: RBNZ's August 2018 Statement on Monetary Policy
Source: RBNZ’s August 2018 Statement on Monetary Policy