Greetings, forex friends! Now that the major central banks have had their say, I thought I’d make a little central bank roundup for today. I have to say, that rhymes by the way.
U.S. Federal Reserve
- Hiked in March
- Crushed rate hike hype
- Still hawkish but path of tightening unchanged
The Fed went on a media blitz ahead of its March FOMC statement, which hyped the market to such an extent that expectations were high that the Fed would signal a faster pace of hiking. Heck, some market players were even pricing-in a followup rate hike by the June FOMC statement.
And as expected, the Fed delivered on a March rate hike. Unfortunately, the market had to swallow a bitter pill when it was revealed that the Fed’s “economic projections are virtually identical to those issued in December” according to Fed Chair Yellen herself.
Worse, the Fed’s projections for the future path of the Fed Funds Rate was also essentially unchanged.
As you can see, the forecast for the Fed Funds Rate for 2017, for example, was unchanged at 1.4%, which means two to three rate hikes for the year, or one to two more hikes after the March rate hike.
But on a more optimistic note, the “dot plot” shows that 14 out of 17 FOMC members (voting and non-voting alike) were now open to three rate hikes in 2017, up from only 11 FOMC members.
Bank of England
- Neutral but with a hawkish twist
The BOE’s MPC was expected to vote unanimously in favor of maintaining the current policy. Well, MPC members did vote unanimously to maintain the stock of stock of government bonds purchased at £435 billion while corporate bond purchases will continue until a total of £10 billion.
However, MPC member Kristin Forbes unexpectedly dissented and voted for a rate hike, because “Inflation was rising quickly and was likely to remain above target for at least three years” while the forecasted slowdown “had not materialised.”
Forbes’ fellow MPC members opted to maintain their neutral monetary policy bias, since they expect that consumer spending will continue to weaken. In addition, uncertainty while a Brexit deal is being hammered out poses a “downside risk to the activity outlook.”
Nonetheless, “some” MPC members revealed their hawkish feathers when they said that “it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
Reserve Bank of New Zealand
- Neutral policy bias (for now and the near future)
- Expects to hike by late 2019
In its March policy statement, the RBNZ maintained its neutral policy bias. Other than that, the RBNZ didn’t seem fazed by the slowdown in Q4 GDP growth, saying that “some of this [weakness] is considered to be due to temporary factors.”
With regard to the surge in inflation, the RBNZ didn’t seem really excited about that, and only quipped that it expects inflation to be “variable over the next 12 months due to one-off effects from recent food and import price movements.”
Despite the RBNZ’s decision to maintain its neutral policy bias during the March RBNZ statement, it should be remembered that in the February RBNZ statement, RBNZ Governor Wheeler said that if New Zealand’s economy progresses as expected, “then over time, in perhaps two years or more out … OCR increases may be needed, and we’ve built one increase over that time.”
European Central Bank
- Neutral but open to easing further if needed
- However, now less likely to ease further
The ECB decided to keep its key interest rates unchanged while maintaining its asset purchases at a monthly pace of €80 billion until end of March. In addition, the ECB upheld its decision to extend its asset purchases until December 2017 (or beyond), but only at rate of €60 billion per month.
However, the ECB upgraded its inflation and growth outlook while conceding that the “risks of deflation have largely disappeared.” And since these “risks of deflation” are the primary reasons why the ECB started its QE program in the first place, ECB Head Draghi removed the phrase “If warranted, to achieve its objective the Governing Council will act by using all the instruments available within its mandate” from his opening statement for the ECB presser.
According to Draghi, this removal signals “that there is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance.”
And while the ECB “continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases,” Draghi also revealed during the Q&A session that the ECB thinks that “the probability of an expectation that will actually materialise into lower level has gone down.” In short, the chance for a rate cut is now lower.
Reserve Bank of Australia
- No clear forward guidance, but seems to have a neutral policy bias
- Also appears unwilling to cut further
The RBA kept the cash rate on hold at 1.50% yet again since “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
There was no forward guidance, but the RBA seems to have a neutral policy bias since it’s optimistic on the overall Australian economy. In addition, the RBA believes that keeping the cash rate steady will make the still ongoing “transition following the end of the mining investment boom” much easier.
However, the minutes of the March meeting also revealed that “Members observed that although credit growth was lower than in previous decades, it had been faster than the subdued growth in household incomes.”
The implication from this revelation is that consumption is mainly debt-driven. And according to the RBA’s February Statement of Monetary Policy, “If households believe that their prospects for future income growth have weakened, particularly for those households servicing sizeable debts, then they could choose to save more in the near term and consumption growth could be lower than forecast.”
In short, if household debt continues to balloon while household income fails to catch up, then consumer spending would sooner or later take a hit as consumers decide to save more.
Moreover, the minutes also revealed that “there had been a build-up of risks associated with the housing market,” adding that “Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income.”
In simpler terms, there are early warning signs of a potential housing bubble. And cutting rates further would only make getting a loan easier, which may exacerbate the problem. The RBA therefore appears to be hinting that it does not want to cut further.
Swiss National Bank
- Neutral policy bias
- Not really looking to hike, but no indication of being open to cuts
- Still threatening to “intervene” in the forex market
- Still saying that CHF is “significantly overvalued“
The SNB is a bit unique among the major central banks, since one of its primary monetary policy tools is to openly threaten intervention in the forex market (*cough* currency manipulation *cough*). And the SNB actually does act on its threats. Heck, in its annual report, the SNB openly stated that it “carried out interventions totalling CHF 67.1 billion” back in 2016.
Having said that, the SNB said its usual piece about the Swiss franc being “significantly overvalued” while threatening to “remain active in the foreign exchange market as necessary” in order “to make Swiss franc investments less attractive, thereby easing pressure on the currency.”
Regarding outlook, the SNB said that it’s “cautiously optimistic” that GDP will grow by “roughly 1.5% for 2017.” With regard to inflation, the SNB upgraded its quarterly forecasts for 2017 reflect higher oil prices. However, CPI is expected to only come in at +0.4% in 2018, a downtick from the original +0.5% forecast.
As for the policy rates, the SNB maintained target range for the Libor rate between -1.25% and -0.25%, with the median target rate at -0.75%. The interest rate on sight deposits, meanwhile, was maintained at -0.75%. No forward guidance on these negative rates, but the SNB did say that its forecasts hinge on he Libor rate remains steady at the median target range of -0.75%. As such, the SNB appears content at keep rates where they are.
Bank of Canada
- Has an easing bias
- Rather pessimistic outlook
Canada released a slew of mostly positive economic reports ahead of the BOC’s March monetary policy statement.
Instead of being happy about these positive economic reports, however, the BOC opted to present a pessimistic face by focusing on the negative aspects or saying that the positive developments are only temporary.
Unfortunately, the BOC didn’t really provide any forward guidance during the March BOC statement. But given the BOC’s obvious pessimism, it’s probably safe to say that the BOC maintained its easing bias.
Recall, BOC Governor Poloz said during the January BOC presser that “a rate cut remains on the table and it would remain on the table for as long as downside risks are still present.”
Bank of Japan
- Open to easing further
- “The BOJ will continue to promote powerful monetary easing“
In the latest BOJ statement, the BOJ noted that the Japanese economy “has continued its moderate recovery trend.” And the BOJ is optimistic that the moderate expansion will continue. Although BOJ Head Honcho Kuroda revealed during the presser that he thinks “downside risks still exceed upside risks.”
As such, the BOJ decided to maintain its current monetary policy, including its so-called “QQE With Yield Curve Control” framework. Kuroda also said during the presser that “If we [the BOJ] need to expand stimulus, I won’t rule out the chance of deepening negative interest rates.”
Going back to the “QQE With Yield Curve Control” framework, Kuroda said that the aforementioned framework is the primary means for the BOJ to “continue to promote powerful monetary easing.”
As I explained in an earlier write-up, this framework aims to keep the yields of 10-year JGBs close to around 0% through unlimited bond purchases. Although the BOJ did say that “the Bank 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.”
And with regard to the BOJ’s aim of keeping JGB yields around 0% despite the surge in global bond yields and the Fed’s rate hikt, Kuroda brushed off calls to raise the yield target by saying that “I don’t see the need to raise our yield target just because a central bank of another country raises rates … Currency rates move on various factors, not just on interest rate differentials.”