It’s been a while since I last did a Roundup of Central Bank Biases. And since the Bank of Canada (BOC) is the only one left that has yet to deliver its policy rate statement this month, I thought that now would be a good time do a quick roundup.
U.S. Federal Reserve
- Likely still on track for two more hikes this year
In the May FOMC statement, Fed officials voted unanimously to keep the target range for the Federal Funds Rate unchanged between 0.75% to 1.00%.
There was no presser, so details were a bit lacking. Still, the Fed did give forex traders, interest rate junkies in particular, enough meat to chew on.
For one, the Fed just shrugged off the poor March NFP report. Another is that the Fed just downplayed the slow GDP growth in Q1 by saying that the Fed “views the slowing in growth during the first quarter as likely to be transitory.”
Moreover, the Fed said that “Inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective.”
Taken together, the Fed’s views on inflation and its downplaying of weak GDP growth and the poor March NFP report all point to the likelihood that the Fed’s projection of up to two more hikes by the end of the year is still intact.
Bank of Canada
- Neutral bias as of April meeting
- Explicitly had an easing bias previously
- Less likely to cut
- A bit worried about a potential housing bubble
As mentioned earlier, the BOC has yet to deliver it’s policy decision and statement. And according to the forex calendar, that’s gonna happen on May 24.
“When we [BOC officials] talked about that [a potential rate cut] a few months ago we had seen a series of disappointing data points that led us to believe that the risks were beginning to tilt towards to the downside and the uncertainties that we were dealing with were similarly negative. And so it’s in that context that we discussed the possibility of easing. But in this context, given the data that we’ve seen in the last few months, I can quite clearly say no, a rate cut was not on the table at this time.”
Even so, Poloz did highlight a potential housing bubble in Canada.
“I would just note that consumer credit is only growing in Canada by around 5 percent per year, mortgage credit by about 6 percent. And so there is no credit boom to go with that speculative phase and so it’s in that sense there are checks and balances lying around.”
“As we’ve observed more than a year ago in the case of Vancouver, where we had similar kind of data points, when there is that large of a gap between what fundamentals might say and what you actually observe, then there is very unlikely to be a sustainable rate of price increase and I think it is timely to remind folks that prices of houses can go down as well as up.”
And as Pip Diddy noted in his latest weekly recap, Canada’s housing market problem has already caused Moody’s to downgrade six of Canada’s major banks. That will likely color the BOC’s upcoming policy decision and statement. Although it must be noted that Poloz acknowledged during his April presser that:
“There’s no question that having had low interest rates for some time that has been one of the things contributing to more demand for housing … Interest rates are not what is fuelling that speculation, it does add to demand at the bottom, of course.” In other words, the BOC is unlikely to cut further since further rate cuts would only help to worsen the housing market problem.
Bank of England
- Hiking bias as of May meeting
- Willing to hike if economy continues to evolve as foercasted
- However, forecasts assume “soft” Brexit
- Has no contingency plan for “disorderly” Brexit
As noted in my 5 Key Takeaways from the BOE’s “Super Thursday” write-up, the BOE maintained its current monetary policy this May.
There were revisions to the BOE’s forecasts, but “Kristin Forbes [still] considered it appropriate to increase Bank Rate by 25 basis points.”
Meanwhile, “some members” still think 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.”
Moreover, “On the whole, the Committee judges that, if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections.”
In short, the BOE clearly has a hiking bias, but most MPC members don’t think the U.K. economy is ready yet. But if the economy evolves within its May forecasts, then “some” may be enticed to vote for a hike.
However, it should be noted that Kristin Forbes, who is the only hawk who walked the talk, will complete her term by June 30. There’s therefore only one BOE meeting left (the June 15 meeting) where Forbes can vote for a hike. After that, the hawkish camp will lose its lead hawk unless the other hawks step up to the plate.
Also, the BOE’s projections are founded on “the assumption that the adjustment to the United Kingdom’s new relationship with the European Union is smooth.”
And as BOE Governor Mark Carney admitted during the presser, the BOE didn’t have any contingency plans for a “disorderly negotiating process,” which is a bit worrying, given the recent tensions between U.K. and E.U. officials.
European Central Bank
- Neutral as of April meeting
- Is still open to easing further if needed
- Clearly not in a hurry to tighten
The ECB decided to maintain its current monetary policy during the April ECB statement.
However, ECB Overlord Mario Draghi elaborated during the presser that “the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished.”
In addition, “Incoming data, notably survey results, bolster [the ECB’s] confidence that the ongoing economic expansion will continue to firm and broaden.”
Even so, “The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside and relate predominantly to global factors.” As such, the ECB has a neutral stance on monetary policy.
Draghi also made it clear that rate hikes are not to be expected anytime soon, when he said that there were no discussions at all about raising the deposit rate.
Moreover, the ECB remains open to easing further if needed because the ECB “not sufficiently confident that inflation will converge to levels consistent with [the ECB’s] inflation aim in a durable, self-sustaining manner.”
Reserve Bank of New Zealand
- Neutral as of May meeting
- Still expects to hike by late 2019
- Beginning to worry about housing market
- May respond to housing market woes by cutting
“Yeah, we’re neutral on monetary policy and, you know, for the foreseeable future we would expect the OCR to remain at its current level.”
Despite the neutral policy bias, the RBNZ actually expects that it may have to hike sooner or later, although “later” would probably be more proper since the RBNZ is not expecte to hike until the later half of 2019.
Also, the RBZN brought up the housing market again. This time, however, the RBNZ seems worried that tight lending conditions to residential property developers is beginning to slow down construction activity. As such, the RBNZ warned that:
“The lower level of construction activity would have two effects: it would reduce growth in the supply of housing, and it would lead to capacity pressure developing more slowly than in the central projection. While lower housing supply would increase house price inflation, the net response in the real economy would be a lower level of inflationary pressure as a result of less capacity pressure”
“To offset weaker inflationary pressure in the scenario, the OCR would need to fall, reaching 1.3 percent by the end of 2018 and remaining below the central projection over the forecast horizon.”
Reserve Bank of Australia
- Seems to have a neutral policy bias as of May
- Also expects to hike in the distant future
- Also has housing market problems
The RBA kept the cash rate on hold yet again during the May RBA statement. More importantly, the RBA sounded a bit less worries about the labor market, although the RBA also warned that wage growth was still slow and “is likely to remain the case for a while yet.”
However, the RBA retained its concern for the housing market when it said that “Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes.”
There was no clear forward guidance, but RBA Governor Lowe delivered a speech on May 4, and he let slip that “at some point, interest rates in Australia will increase.”
However, Lowe quickly added that:
“To be clear, this is not a signal about the near-term outlook for interest rates in Australia but rather a reminder that over time we could expect interest rates to rise, not least because of global developments.”
In short, the RBA and the RBNZ have similar monetary policy biases in that both central banks are currently maintaining a neutral stance, but both look to hike in the distant future. Also, both have housing market problems, albeit different kinds.
Bank of Japan
- Neutral as of May meeting
- Described economic development as “moderate expansion”
- No longer looking to cut negative rates deeper or expand JGB purchases
- No signs of stopping or tapering on JGB purchases, though
- Hinted that an exit strategy is in the works
- Not in a hurry to start tightening, though
In its April BOJ statement, the BOJ decided to maintain its current monetary policy, including its so-called “QQE With Yield Curve Control” framework.
Kuroda also said during his presser that:
“I don’t think we are facing any problems achieving our yield targets while having the 80-trillion-yen guidance in place”
This implies two things. The first is that the BOJ has no plans to stop or taper its JGB purchases. The second, meanwhile, is that the BOJ thinks that its JGB purchase amounts are enough, so expanding the amount of JGB purchases is apparently not needed.
As to why the BOJ seems content, that likely had to do with the BOJ’s upgraded forecasts and upbeat assessment of the Japanese economy, as revealed in the BOJ’s Outlook Report.
In fact the BOJ used the term “moderate expansion” to refer to the Japanese economy. Market analysts say this is pretty significant because the BOJ hasn’t used that term since March 2008.
Despite the upbeat assessment and upgraded forecasts, however, Kuroda said that “Talking about a specific exit strategy now would cause undue confusion in markets” because “inflation is around zero percent.”
Even so, Kuroda said the following about inflation in a May 5 CNBC interview:
“I think deflation by definition means continuous downward movement of prices. That situation has gone already. We are not in a deflationary situation anymore. However headline inflation has been quite slow to adjust upward, partly because oil prices declined quite sharply in the last two years.
Moreover, Kuroda hinted that the BOJ is working on an exit strategy from its accommodative monetary policy.
“Inside the bank, of course we have various simulations of potential exit strategies and so on and so forth. But as I said, it’s premature to openly discuss exit strategy at this moment when inflation rate is still close to zero, although improving. And we expect inflation, price target to be met sometime around fiscal 2018. But there could be downside as well as upside risks. And we have to be flexible. And at this moment, it’s certainly premature to speak, in concrete terms, about exit strategy.”
Swiss National Bank
- Neutral policy bias as of March
- Willing to cut further if needed
- Still threatening to “intervene” in the forex market
- Still saying that CHF is “significantly overvalued”
Back in March, 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.”
No forward guidance was provided, but SNB Don of Dons Thomas Jordan did say during an April 28 speech that:
“If necessary, we [the SNB] can lower the negative interest rate further or buy additional foreign currency.”
Jordan explained that the SNB’s easing bias is because the SNB is “experiencing an unusually long period filled with difficult tasks and decisions.”