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Okay, it’s time for Part 2 of my two-part series on the latest central bank biases. This time, we’ll be discussing the central banks that have a neutral policy bias. And interestingly enough, they’re the central banks of the three comdolls.

Bank of Canada

  • No explicit forward guidance
  • Neutral bias likely maintained
  • BOC’s Wilkins hinting at a hawkish tilt
  • Still concerned about Canada’s housing market

During the May 24 BOC statement, the BOC announced that it was keeping the overnight rate steady at 0.50%.

More importantly, the BOC just shrugged off the recent miss in CPI readings, even though headline CPI missed the BOC’s own forecasts and two (out of three) of the BOC’s preferred core inflation measures have been trending lower.

The BOC also had an optimistic outlook on growth. This can be seen when the BOC pointed out that:

The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment.”

Moreover, consumer spending has been “robust” even though “wage growth is still subdued.”

The BOC retained its concern over the housing market, although it doesn’t think that the problem has reached the tipping yet. Specifically, the BOC said that:

“Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets.”

And remember, Moody’s downgraded the long-term credit rating of Canada’s banks back on May 10, with the rationale given as follows:

“Today’s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future. Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.”

Anyhow, the BOC didn’t really provide any forward guidance during the May monetary policy statement. However, the BOC’s apparent lack of worry over the relatively poor inflation readings and upbeat outlook on the economy very likely means that the BOC maintained its neutral poloicy bias.

And as a refresher, the BOC switched from an easing to a neutral policy bias during the April BOC statement when BOC Head Stephen Poloz openly admitted during the presser that the BOC no longer sees the need to cut (emphasis mine).

“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.”

Having said that, BOC Senior Deputy Governor Carolyn Wilkins gave a speech on June 12. And in her speech, Wilkins talked about the “diversity” of Canada’s industrial structure and how that made the economy “more resilient—although not immune—to shocks.”

She also talked about how Canada’s economy is growing and that “growth is not being driven by just a few key industries” since “more than 70 per cent of industries have been expanding—a rate we have not seen since the oil price shock.”

Given all these positive developments, Wilkins concluded that (emphasis mine):

“As growth continues and, ideally, broadens further, Governing Council will be assessing whether all of the considerable monetary policy stimulus presently in place is still required.”

BOC Boss Poloz was in a radio interview the following day (June 13), and he didn’t really support or try to shoot down Wilkins’ hints at apotential rate hike.

He did weakly hint that he may also be tilting towards the hawkish camp when he said that (emphasis mine):

“What that [the data] suggests to us is that the interest rate cuts we put in place in 2015 have largely done their work.”

Poloz did sound more reserved, though, since he was quick to add that “It isn’t time to throw a party” because the business investment growth is still slow. Still, pretty interesting developments.

Reserve Bank of New Zealand

  • Neutral as of June meeting
  • Likely still expects to hike by late 2019
  • Didn’t try to talk down the Kiwi’s recent rise

The RBNZ decided to maintain the OCR at 1.75% during the June 21 RBNZ statement. In addition, the RBNZ said that:

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

This is the same thing the RBNZ said in its official press statement for the May 10 RBNZ monetary policy decision. And back in May, the RBNZ was asked to clarify this statement, and RBNZ Governor Wheeler answered as follows (emphasis mine):

“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.”

It’s therefore almost certain that the RBNZ maintained its neutral policy bias. And as the RBNZ explained back in May, it doesn’t want to raise or lower rates for the time being because:

“Premature tightening of policy could undermine growth, causing inflation to persistently undershoot the target midpoint. Further policy easing, in an attempt to see non-tradables inflation strengthen more quickly, would risk generating unnecessary volatility in the economy.”

It should be pointed out that the RBNZ is looking to hike by the later half of 2019, though. And since the RBNZ just downplayed New Zealand’s slow Q1 GDP growth and remained optimistic on growth during the June RBNZ statement, it’s probably safe to say that the RBNZ is still expecting a hike in two years.

Another interesting point from the June statement is that the RBNZ refrained from trying to talk down the Kiwi or sounding worried about the Kiwi’s recent rise, even though the Kiwi’s trade-weighted index (TWI) was already well above the RBNZ’s own forecasts.

This likely means that the RBNZ thinks that the Kiwi’s recent rise is not yet enough to hurt New Zealand’s exports.

Reserve Bank of Australia

  • Seems to have a neutral policy bias as of June
  • Also expects to hike in the distant future
  • Optimistic on growth
  • Also has housing market problems

The RBA kept the cash rate on hold at 1.50% during the June 6 RBA monetary policy decision. And the RBA’s overall tone was rather neutral since it just noted recent developments in a matter-of-fact manner.

It’s assessment and outlook on growth, inflation, and the housing market had hints of optimism, though.

The minutes of the June meeting provided more details. With regard to growth, in particular, the RBA thinks that (emphasis mine):

“Domestically, members’ assessment was that the transition to lower levels of mining investment following the mining investment boom was almost complete. Surveyed business conditions had improved and business investment had picked up in those parts of the economy not directly affected by the decline in mining investment. Although year-ended GDP growth was expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the figures, members noted that economic growth was still expected to increase gradually over the next couple of years to a little above 3 per cent per annum.”

On inflation, the RBA noted that wage growth “has remained low and this was likely to remain the case for some time yet.” This has restrained consumer spending and, by extension, domestic inflationary pressure. However, the RBA also noted in the minutes that (emphasis mine):

“The wage price index had increased by 0.5 per cent in the March quarter, suggesting that aggregate wage growth had stabilised at low levels. Wage growth had remained particularly low in the mining sector. Liaison suggested that, while wage growth is likely to remain subdued for some time yet, there had been isolated reports of localised and skills-specific labour shortages feeding into higher wages.”

As for the housing market, the RBA just noted that housing prices “have been rising briskly in some markets, although there are some signs that these conditions are starting to ease.” The chance of a housing bubble is still not very high in the RBA’s opinion.

That didn’t stop Moody’s from downgrading the long-term credit rating of Australian banks last week, though, with concern over the housing market being cited as the reason for the downgrades.

“In Moody’s view, elevated risks within the household sector heighten the sensitivity of Australian banks’ credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years.”

“In Moody’s assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness.”

Anyhow, aside from the RBA’s neutral tone, there wasn’t really any forward guidance. However, RBA Governor Lowe did say during a May 4 speech that: “at some point, interest rates in Australia will increase.”

Lowe was quick to add 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 other words, the RBA has a similar monetary policy to the RBNZ in that both the RBA and the RBNZ currently have neutral policy biases, but both are looking to hike down the road, with the RBNZ looking to hike in two years (if economic conditions evolve as expected) while the RBA has yet to communicate when it expects to start removing accommodation.