Earlier this week, we saw not one, but TWO central banks publishing their monetary policy decisions for the month of March. What exactly did the RBA and ECB have to say? Here are key takeaways you need to know:
Reserve Bank of Australia (RBA)
Still no policy changes!
For a sixth month in a row since cutting it in August, the RBA’s interest rates remains at 1.50%.
Apparently, Philip Lowe and his gang believe that “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.” Not really surprising after Lowe has all but said that they’re done cutting rates for now!
The global economy is fine
The RBA barely made any changes from its outlook last month. It still believes that improvements in the global economy have boosted commodity prices, which have provided “significant” boosts to Australia’s income. It’s also still iffy about China’s recovery, saying that the composition of growth and the pace of borrowing still pose risks. Lastly, it recognized that higher inflation rates are partly due to higher commodity prices.
Ditto for the domestic economy
The central bank noted that the economy is “continuing its transition” from the mining boom by growing by 2.50% in 2016. It nodded to exports that have “risen strongly”as well as “non-mining business investment that has risen over the past year.”
The RBA also emphasized that its optimistic outlook is supported by low interest rates and exchange rates. It repeated that the Aussie’s depreciation since 2013 has “assisted the economy” from the mining boom, and that a stronger Aussie would “complicate” the adjustment.”
As for the labor market, the RBA still thinks indicators are mixed, but this time it conceded that employment growth is concentrated in part-time jobs. This, as well as the subdued labor cost growth, is why the central bank expects underlying inflation “to stay low for some time” even as headline inflation is expected to hit above 2.0% in 2017.
AUD bulls saw red
Remember market players were mostly expecting the RBA to strike against the Aussie’s recent gains by jawboning a bit.
But with Lowe and his team mostly maintaining their stance last month, traders have moved on to expect rate hikes from the central bank this year. After the release, futures pricing showed a 33.3% (up from 29.9%) possibility of a rate hike before 2017 while rate cut speculations slipped from 3.4% to 3.3%. Not surprisingly, the Aussie ended the day higher against its counterparts.
European Central Bank (ECB)
No changes to its current policies
As expected, the ECB made no changes to its current policies. Interest rates on the main refinancing operations, marginal lending facility, and the deposit facility remain at 0.00%, 0.25% and -0.40% respectively.
The Governing Council also maintained that they “expect 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.”
Meanwhile, the ECB is pushing through with its plan to taper its monthly asset purchases from 80B EUR to 60B EUR starting next month until December. But before you celebrate, the central bank is also warning that it could extend its programme if the rate of inflation needs a boost.
No “sense of urgency” to add more stimulus
Perhaps the biggest bombshell of the ECB’s event yesterday was the announcement that the ECB feels that “there is no longer a sense of urgency in taking further actions.”
Is this the real life or is this just fantasy? If you’ve looked at the official release closely, you’ll see that Draghi and his gang have removed
“If warranted, to achieve its objective the Governing Council will act by using all the instruments available within its mandate”
from its introductory statement. When pressed about it, Draghi pointed to a few factors that influenced their decision:
First is that the economy has improved since the ECB started its QE program. Draghi detailed that
“Since 2015 real GDP growth has been steady at between 0.3% and 0.6% quarter-on-quarter. The Economic Sentiment Index in February this year is the highest since 2011. The PMI composite output index, again this February 2017, is the highest since April 2011. The unemployment rate in January was 9.6%; it’s the lowest since May 2009.”
Next, the ECB head honcho repeated that “risks of deflation have largely disappeared.” This is a big deal especially since risks to deflation are what caused the ECB’s urgency to make moolah rain in the first place.
Last but not the least, Draghi pointed to the balance of risks, which he says “has improved as far as growth is concerned.” We later learn that this includes geopolitical risks that have not negatively affected the euro zone economy as much as the ECB has estimated.
Higher growth and inflation outlook
As if not considering more stimulus isn’t enough, the ECB also upgraded its growth and inflation estimates.
The ECB’s staff now see the euro zone’s annual GDP growth rate at 1.8% in 2017 (up from 1.7%); 1.7% in 2018 (up from 1.6%), and 1.6% in 2019 (same as December’s forecasts).
Meanwhile, annual HICP inflation is upgraded from 1.3% to 1.7% in 2017 and 1.5% to 1.6% in 2018 even as 2019’s estimates was downgraded from 1.9% to 1.7%.
Do these mean that the ECB is ready to taper?
Not quite. While Draghi has admitted that risks to deflation have largely disappeared, he also noted that they’re for longer-term estimates and that it’s too soon to pronounce victory over deflation.
So what is the ECB waiting for? Well, you might want to keep looking at underlying inflation. See, the ECB STILL believes that there are “no signs yet of a convincing upward trend in underlying inflation.” Remember that the central bank named four conditions before they consider a rise in inflation as legit (it’s in their January policy statement).
For now, underlying inflation is still expected to “rise only gradually in the medium-term” and that “a very substantial degree of monetary accommodation is still needed” for underlying inflation to keep up with the headline figures.
That doesn’t meant that the ECB is all talk about its optimism, though! Draghi also shared that he and his friends have not discussed the prospect of extending its targeted longer-term refinancing operations (TLTRO). At all. For newbies out there, you should know that the program is designed to provide cheap, long-term loans to commercial banks and is set to end with the March 23 auction.
Opinions on politics-related issues
Here’s a list of notable sentiments from Draghi’s Q&A:
On political risks – When asked about the elections in the euro zone, Draghi noted that the ECB now believes that “the domestic sources of risk have been more contained.” In fact, the central bank now thinks that political risks in the euro zone now pale in comparison to global geopolitical risks. Draghi had this to add (emphasis ours):
“You remember the Brexit, you remember the Italian referendum, you remember the new US administration. Now we have the elections in Europe. Now, these risks, some of them have materialised but we haven’t seen yet a significant economic impact.“
On Germany as currency manipulator – When asked if the U.S. has merit in criticizing Germany as a currency manipulator, Draghi quickly defended that “I don’t think there is any merit in attacking Germany.” Then, in grade-school-teacher style, he explained that
“The currency of Germany is the euro and the euro area’s monetary policy is conducted by the ECB. The ECB is independent as laid down in the European treaties and in the Statute. The exchange rate of the euro is determined by market forces…”
On the future of the euro – When asked if he’s worried about eurosceptic candidates winning in elections, Draghi replied that “the euro is here to stay.” He added explained that, in a way, the euro “has been the cornerstone, the pillar upon which the single market could survive” and that there is no European Union without the single market.
Overall, it looks like the ECB did a pretty good job of recognizing growth and inflation prospects even as the members are still not sold on tapering their purchases just yet. While threats of deflation have eased enough to not need more stimulus, it’s also not rising fast enough to warrant tapering anytime soon.