The month is about to end and all the major central banks have already delivered their monetary policy announcements. Now would therefore be a good time for another central bank roundup.
Oh, do note that this will be a two-part series. And in today’s write-up, we’ll be discussing the central banks that clearly have a hawkish or dovish bias when it comes to monetary policy.
U.S. Federal Reserve
- Still open to one more hike this year
- Plans to start trimming balance sheet “this year”
- Expects “additional, gradual rate hikes” in the “next few years”
During the June FOMC meeting, Fed officials voted to hike the target range for the Fed Funds Rate by 25 basis points to a new target range of 1.00% – 1.25%.
The Fed also upgraded its GDP growth projections for 2017 and forecasted lower jobless rates for 2017, 2018, and 2019.
Interestingly enough, the Fed hiked as it downgraded its inflation projections for 2017.
Yellen explained the downgraded 2017 inflation reading by saying that it was due to the recent string of weak inflation numbers, which were “driven significantly by what appear to be one-off reductions in certain categories of prices, such as wireless telephone services and prescription drugs.”
Yellen then added that “employment [is] near its maximum sustainable level and the labor market [continues] to strenghten,” which will likely apply upward pressure on wage growth sooner or later. And that’s why inflation projections for 2018 and 2019 were essentially unchanged.
Given the Fed’s expectations that inflation will still accelerate and that employment conditions will improve further, the projected path for the Fed Funds Rate remained unchanged, which means that the Fed thinks that there’s still room for one more hike this year.
Moreover, the Fed revealed its plans for trimming its balance sheet. To be more specific, the Fed plans to to allow $6 billion worth of the Fed’s government bond holdings to mature per month. And the principal payments beyond this set amount would be reinvested. After that, the set amount would be increased by $6 billion every three months until it reaches $30 billion per month.
For the agency debt and mortgage-backed securities in the Fed’s balance sheet, the plan is to have an initial cap of $4 billion, which will then increase by $4 billion every three months until it reaches $20 billion per month.
The Fed also noted that it “currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.”
And despite the Fed’s plans to trim its balance sheet, which theoretically will have a similar effect on long-term borrowing costs as a rate hike, Fed Head Yellen said that “additional, gradual rate hikes would likely be appropriate in the next few year to sustain the economic expansion.”
Bank of England
- Still has a hiking bias as of the June meeting
- Kristin Forbes still a hawk
- Ian McCafferty and Michael Saunders revealed to be hawks
- BOE Chief Economist Haldane is also a hawk
- BOE Governor Carney not ready to join the rate hike squad, though
- Also, hikes should only be “at a gradual pace and to a limited extent”
As noted in my 5 Takeaways from the BOE’s June Policy Decision, the BOE maintained its current monetary policy.
As such, the Bank Rate was maintained at 0.25% while the stock of government bonds and corporate bonds purchased will be maintained at £435B and £10B respectively.
However, Ian McCafferty and Michael Saunders joined Kristin Forbes in voting for a hike. This was an unexcpectedly hawkish move since the consensus was that only Forbes will continue voting for a hike.
Moreover, BOE Chief Economist Andy Haldane, who was a well-known dove, gave a speech on June 21 wherein he explained that he too is now a hawk and even considered voting for a rate hike during the June BOE meeting.
BOE Governor Carney is also looking to hike. However, he explicitly said during a June 20 speech that he personally thinks that present conditions and near-term future expectations (especially with the start of Brexit negotiations) don’t warrant a rate hike just yet when he said the following (emphasis mine):
“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment [a rate hike]. In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”
Again, Carney is dovish in that he personally doesn’t want to support hikes just yet. However, Carney is still a hawk in that the next move he’s contemplating is to hike. I guess you can say he’s a hawk with some dovish feathers.
Also worth noting is that the BOE is not as hawkish compared to the U.S. Fed. This is made clear when the BOE minutes pointed out and Carney himself said that “all [BOE members] expect that any changes would be limited in scope and gradual in pace.”
Bank of Japan
- No signs of stopping or tapering on JGB purchases
- No predetermined amount for JGB purchases
- No plans for an exit strategy from “ultra-loose” monetary policy until 2% inflation target hit
- Bias on interest rates not discussed
In its June 16 statement, the BOJ announced that it decided to maintain its current monetary policy. The policy rate is therefore still at -0.10% and the BOJ still aims to keep the yields of 10-year JGBs at around 0% through its QE program.
The BOJ’s bias on interest rates was not discussed, but Kuroda had this to say about the BOJ’s QE program during the presser:
“The pace of our government bond buying will fluctuate from time to time depending on market conditions. The amount we buy would be determined based on how much is necessary to guide interest rates appropriately. We won’t set in advance the pace of our bond buying.
In short, unlimited bond purchases with no set amount, so no plans to taper its QE program. In addition, Kuroda said that:
“There’s some distance to achieving 2 percent inflation, so it’s inappropriate to say now specifically how we will exit our ultra-loose monetary policy and how that could affect the BOJ’s financial health. Laying out specific simulations now would only create confusion. We will debate an exit strategy only after 2 percent inflation is achieved and price growth stays there stably.”
It’s therefore clear that the BOJ has no plans to exit its “ultra-loose” monetary policy of unlimited JGB purchases and negative rates just yet until and unless inflation exceeds the BOJ’s 2% target.
And it should be noted that while the BOJ is optimistic that inflation will rise, the BOJ also acknowledges that it will take “some time” to happen, so the BOJ will very likely be keeping its negative rates and continue its asset purchases for some time as well.
“It is taking long to turn around Japan’s deflationary mindset because the country has been mired in deflation for a long time. People tend to act on the assumption that wages and prices won’t rise.”
“We’re recently seeing some data showing inflation expectations not just bottoming out but heading higher. But we can’t say yet that inflation expectations have completely turned positive … At some point, we expect underlying inflation and inflation expectations to heighten. But that will take some time.”
Swiss National Bank
- No plans to end expansionary monetary policy yet
- Still has room to cut negative rates deeper
- Still threatening to “intervene” in the forex market
- Still thinks that CHF is “significantly overvalued”
The SNB is unique in that one of its main monetary policy tools is to intervene in the forex market by conducting foreign currency purchases (i.e. blatant currency manipulation).
And the SNB really does intervene.. In its most recent annual report, for example, the SNB openly shows that it “carried out interventions totaling CHF 67.1 billion” in 2016.
And in its June 15 monetary policy statement, the SNB restated that the Swiss franc is “still significantly overvalued” while also delivering its usual threat that the SNB “will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.”
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%.
There was no forward guidance on interest rates, but SNB Head Thomas Jordan did say during the SNB’s annual shareholder meeting on April 28 that:
“If necessary, we can lower the negative interest rate further or buy additional foreign currency.”
The SNB therefore still has an easing bias on interest rates.
Moroever, Jordan’s assessment of the Swiss economy during the June 15 SNB statement wasn’t all that upbeat since “certain indicators suggest that the recovery has not yet taken hold in all areas of the economy.”
And Jordan was quick to add that “the strong Swiss franc continues to weigh on some industries.”
Also, “Inflation remains very low and capacity utilisation continues to be unsatisfactory.”
Jordan therefore concluded that the SNB’s “expansionary monetary policy remains necessary in order to ensure price stability, while taking due account of economic developments.”
European Central Bank
- Easing bias on interest rates removed
- Still has an easing bias on asset purchases
- Not confident that rise in inflation is sustainable
- Ready to expand asset purchases if conditions deteriorate
- Willing to switch back to rate cut mode if conditions worsen
In its official press statement for the June 8 monetary policy decision, the ECB maintained its current monetary policy while stating that it expects interest rates “to remain at their present levels for an extended period of time.”
However, the ECB also quite noticeably removed the phrase “or lower levels” when referring to interest rates, which means that it no longer has an easing bias when it comes to interest rates.
This neutral stance on interest rates was confirmed by ECB President Draghi during the presser.
However, Draghi very clearly pointed out that the ECB still has an easing bias when it comes to its QE program and that the ECB is ready to switch back to a rate cut bias when he said the following (emphasis mine):
“The other point was about why we left the other bias, the APP [asset purchase program or QE program] bias, easing bias. Well, first of all, the two are very different. The first is an expectation that interest rates will remain at present or lower levels. Now, if you ask me now, ‘What do you expect?’ I would say that based on a current assessment, current information, I don’t expect lower interest rates. If you ask me, ‘But in case things were to worsen, are you ready to lower interest rates?’ the answer is yes. So the APP easing bias is like this. It’s part of a reaction function and it does say that if things were to turn less favourable – and here, just stop a moment: if things were to turn less favourable, it’s a set of contingencies which is more benign than the tail-risk contingency embodied in the expectation on rates, and as such it’s still there. So it’s part of our reaction function. If things turn out to be less favourable we are ready to expand our APP. That’s the answer.”
As to why the ECB has no plans to hike rates and still has an easing bias on its QE program, that’s because “the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term.”