There were lots of central bank events this week (so far), and if you need a quick recap on the most important ones, then today’s write-up is just for you.
1. RBA Meeting Minutes
The RBA decided to keep its powder dry during the November 1 RBA statement, and the RBA meeting minutes released on Tuesday help to explain why.
The RBA was very happy “that bulk commodity prices had increased significantly since the beginning of 2016” since that resulted in “the terms of trade [rising] for the first time in two and a half years,” so much so that the RBA revised its forecasts higher. The rise in commodity prices was attributed to “a more broadly based increase in producer prices in China,” thanks to “strong growth in government-funded infrastructure projects.”
On domestic growth
Despite the higher terms of trade, however, “GDP growth was expected to decline in year-ended terms before increasing to be above potential growth later in the forecast period.” The low expectations for GDP were due to the drag on growth from falling mining investment and below-average consumer spending.
On the labor market
With regard to the labor market, the RBA highlighted that employment growth was being fueled by part-time employment and that the labor force participation rate is at a multi-year low. As such, “there was uncertainty about the degree of spare capacity in the labour market and how this might ultimately affect inflationary pressures.”
Speaking of inflation, the RBA pointed out that headline Q3 inflation was at 1.3% while underlying inflation was at 1.2%. This is within expectations, since “Underlying inflation was expected to remain at around 1½ per cent over 2016, before rising to 1½–2½ per cent by the end of the forecast period.”
On the housing market
The RBA noted that “rental inflation had remained very low and there had been a broad-based decline in growth in dwelling construction costs.” However, “housing price growth had picked up noticeably in Sydney and Melbourne,” even though “housing turnover and growth in housing credit both remained lower than a year earlier.” This has made assessing the conditions in the housing market “more complicated.”
On monetary policy
The RBA refrained from cutting rates further because economic conditions evolved mostly within the RBA’s projections. Also, the RBA was a bit worried about the housing market. As for forward guidance on monetary policy, the RBA, unfortunately, didn’t give any, which is a real bummer.
2. BOE Inflation Report Hearings
BOE Guv’nah Mark Carney and other MPC members testified before the Treasury Committee on Tuesday. And here are some of the more interesting and important points that were discussed.
On monetary policy
Carney was asked about the BOE’s monetary policy bias. And Carney replied by saying the following (emphasis mine):
“At the moment there is no guidance on the future path of policy. I would leave it as simply as that.”
“What we have now is a neutral bias so we’ve got to a position where we think the stance, the unanimous view of members of the MPC is that the stance on monetary policy is appropriate, we’re still in a position of uncertainty there’s reasons why the economy could turn out stronger, inflation higher or the opposite, there’s risks on both sides so rates could go up they could go down – so it’s a neutral bias, we’re about as explicit as that.”
“For the avoidance of doubt, we have a balanced risk assessment, neutral bias to monetary policy we’re not in active consideration of expanding programs. We just took a decision and the view, my personal view and the view of the rest of the MPC, was that the stance of the policy is appropriate.”
On the pound
With regard to the pound’s recent fall, Carney said that it “has been consistent with an expectation of a reduced degree of openness and a slower pace of growth than has been the reaction of consumers.” But on a more upbeat note, the lower pound is expected to have an inflationary effect, so much so that CPI is expected to “be above 2 percent by the middle of 2017 and stay there for a while.” Moreover, the BOE sees “the potential for the current account deficit to halve, almost halve, over the course of the next three years, to get to 3, 3.5 percent of GDP,” thanks in part to the lower pound.
On Brexit & the U.K. economy
With regard to the Brexit referendum and its effect on the economy, Carney and friends had this to say:
“Business investment has been soft, it’s just been a little less soft than we had expected.”
“The degree of uncertainty in the very short term has been a bit lower and financial conditions have been a bit better, I would argue that for both of those that’s not entirely unrelated to what we did in August.”
“In terms of the overall reaction of the economy, this is more of a slow motion slow down than a sharp adjustment.”
Also, Carney warned that:
“When there’s a trade deal, the shortest transition period I’ve ever seen in a trade deal is two years, which was the Swiss-EU deal on insurance. Normally it’s in the range of four to seven years.”
This transition period would be a source of uncertainty, but it would actually be good for businesses because there would be less waste and turmoil, since “you restructure during that restructuring window. You don’t need to do it in advance, in anticipation of what agreement the government ends up striking.”
3. BOJ Implements Unlimited JGB Purchases
During its September monetary policy statement, the BOJ introduced a new framework called “QQE With Yield Curve Control.” Basically, the BOJ is now targeting the yield curve of Japanese government bonds (JGBs) and will try to keep the yield curve at around 0% at all costs.
In order to achieve this, the BOJ effectively abandoned its original target of expanding the monetary base by ¥80 trillion and then buying ¥80 trillion worth of JGBs per year.
This means that the BOJ can expand the monetary base as much as it needs to and it can also now buy unlimited JGBs. However, the BOJ did not think it was necessary to use its new weapon at the time.
Well, the selloff in global bonds and rising bond yields finally forced the BOJ’s hand earlier today, and so the BOJ announced that it was using its new weapon by carrying out two bond-buying operations.
Amusingly enough, Bloomberg later reported that no financial firm offered to sell to the BOJ. However, the BOJ’s announcement did a number on the yen, since it apparently showed that the BOJ is ready and willing to implement its new framework.