Central Bank Watch December 2020: Part 2

Author: Giles Coghlan | Category: Central Banks

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Bank of England, Governor Andrew Bailey, 0.10%, Meets December 17

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Brexit, Covid-19, and a slowing economy all continuing to weigh on the GBP. The BoE kept interest rates unchanged at0.10%. The November meeting took place amid the US election drama so it was easy to overlook. The meeting took account all of the recent lockdown restrictions announced by the UK Gov't top to and including October 31 (The day the lockdown was announced). The Bank of England kept interest rates unchanged at 0.10%, but increased asset purchases more than expected to £875. Asset purchases were expanded by £150 bln vs the £100bln expected. However, the reaction out of the meeting was a rising pound despite the increase in asset purchases (normally GBP negative). Why? This was due to a luke warm sentence on negative rates. The Bank of England said that 'participants attach some weight to the possibility of a negative bank rate'. Investors had been hoping for a more enthusiastic move towards negative rates. However, given the fact that the BoE have asked commercial banks to report back to them on the the profitability on negative rates thy would most likely wait to hear back from them before deciding on negative rates one way or the other. The deadline for hearing back was after the last meeting, so this makes sense why the BoE were pretty neutral. Furthermore, the Chief Economist, Andy Haldane is not overly keen on negative rates and this makes sense as their value is far from clear from other central banks that have used them. You can read the full report here.

One interesting aside is that the Bank of England's last rate meeting was very positive regarding Brexit. The minutes said, 'Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen.  The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4.  UK trade and GDP are also likely to be affected during an initial period of adjustment, over the first half of next year, as the United Kingdom leaves the Single Market and Customs Union on 1 January and is assumed to move immediately to a free trade agreement with the European Union'.It seems even the BoE is assuming a deal with Brexit will be done. If it doesn't expect heavy GBP selling as it will wrong foot the Bank of England.

Swiss National Bank,Chair: Thomas Jordan, -0.75%, Meets December 17

The SNB interest rates are the world's lowest at-0.75% and haven't changed at a scheduled meeting since 2009. In September the SNB left rates unchanged. The inflation forecast was higher than in June's forecast and rising oil prices was the cited reason. The forecast for 2020 was -0.6% (vs -0.7% forecast in June) and +0.1% for 2021 and +0.2% for 2022.The SNB started also said that they would publish data on FX market interventions quarterly rather than annually. This will compliment the weekly sight deposits data and is in large part a move against the US and the claim that the SNB is a currency manipulator. The CHF was once again labelled as 'highly valued' at the meeting. A strengthening Franc hurts the Swiss export economy a number of large institutions, like UBS Group, Raiffeisen Bank International AG and Bank J. Safra Sarasin, had been calling for a rate cut for Autumn of last year. So far these calls have not been heeded. The Swiss are always mindful of the EURCHF exchange rate because a strong CHF hurts the Swiss export economy. The SNB want a weaker CHF. The rest of the world wants CHF as a place of safety in a crisis, so we have this constant tug of war going on. No changes are expected for December's meeting.

Read the full statement here.

For more details on the sight deposits check out SNBCHF.comThis site called the removal of the floor back in 2015, so well worth checking out.

Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets December 18


The Bank of Japan is another  bearish bank and the latest meeting saw no major shift. They kept monetary policy as expected and rates unchanged at -0.10%. The Yield Curve Control is maintaining its flexible target with 10yr JGB yields at around 0%. Projections were revised lower this year, but higher next. Fiscal median forecast was -5.5% from -4.7% this year and 3.6% from 3.3% for next year. Core CPI was -0.6% from -0.5% for this year, but 0.4% from 0.3% for next year. In the big picture Inflation in Japan continues to miss the 2% target and the BoJ have stated that they will 'keep very low interest rate levels for an extended period of time'. All in all the BoJ remained on the fence at this last meeting. No changes are expected for December's meeting.

You can read the full statement here.

Reserve Bank of New Zealand, Governor Adrian Orr, 0.25%,Meets December 31

The RBNZ kept the asset purchase programme maintained at $NZD100 billion and introduced the new Funding for Lending Programme as planned. Furthermore, the RBNZ maintainedprojections that the Official Cash Rate would remain at 0.25% until March 2021. At first glance all appears to be as expected. However, the detail shows revisions for inflation and employment. Inflation is nowexpected to rise to 0.9% in Dec 2021 vs the previous forecast of 0.3%. Employment was projected to still weaken further in the near term, but then pick up into next year. However, it is not just the more optimistic outlook that caused the market to buy NZD. It is also the fact that the last RBNZ meeting was really designed to launch the Funding for Lending Programme. The whole principal of this programmes is that if rates do go negative banks can easily pass that savings onto customers. Here is an extract from the RBNZ's statement:

Members noted that the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor pass-through to lending rates closely. Members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus, and that it was the best tool to deploy at this time given the Committee's principles for alternative monetary policy instruments

So, the RBNZhave needed to keep up some sense of why this is an importantmove at the meeting. In theory they can still cut rates to negative and have deliberately kept that option open. However, the message given by Governor Orr speaks clearly as he resisted the calls to cut rates earlier in that the rate is to remain at 0.25% until March 2021. There were no earlier calls for negative interest rates before then. The investment banks ANZ reduced their calls and see a cut to 0.10% in May and -0.25% in Aug 2021. ASN no longer expects negative interest rates at all and that seems the most likely route now. At the time I flagged a EURNZD short trade out of the event. Eamonn had the lowdown first off as the 'unconstrained OCR track' now views that around 100bps less stimulus is necessary. So, it was no surprise that the Assistant Governor Hawkesby confirmed on November 12 that less stimulus is required going forward for the RBNZ. On November 24 the NZD saw another spike higher as New Zealand PM Arden requested Governor Orr to consider house prices at monetary policy meetings. The bottom line impact of this was seen in the New Zealand 10 year bond yields which spiked to November 09 highs as the RBNZ was seen as even less likely to need to use negative rates.

A NZDUSD long bias into December looks good from seasonal USD outflows and RBNZ shift away from negative rates. Worth taking a look at that...

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