Central bank overview
Bank of England, Governor Andrew Bailey, 0.10%, Meets March 18
Brexit, Covid-19, and a slowing economy all continuing to weigh on the GBP. The BoE kept interest rates unchanged at 0.10%. The November meeting saw GBP buying on 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. The last Bank of England rate meeting was always going to be about one thing; would the bank walk towards or away from negative interest rates? Since the start of the year Governor Bailey's comments had been interpreted as walking back market expectation from the Bank using negative interest rates. The fact that the UK managed to avoid a 'no-deal' Brexit would have been a big sigh of relief to Governor Bailey. Perhaps it was this that helped him mentally walk back from the use of negative interest rates. It was certainly referred to in the MPC (Monetary Policy Committee) minutes as a point to note.
The last Bank of England meeting this month cemented the Bank Of England's aversion to using negative interest rates. The UK 10 year bond yield chart shot higher as bond traders started to price out any remaining expectations of the Bank of England using negative rates. There is now a tail risk of a rate hike coming into the markets. Remember, that although the Bank of England announced preparations for PRA regulated firms to implement a negative bank rate the bank made it clear this was 'not a signal about the future path of monetary policy'. This was about form rather then intention. Call it the British love of bureaucracy. The GBP was supported out of the meeting as the MPC had a 'materially stronger than expected' view on growth. You can read that sentence here in the Bank's report. This was partially reflected in the UK Q4 preliminary GDP figures out yesterday. This has helped the GBP higher.Any hikes in interest rates are only set to come when there is 'clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably'.
Swiss National Bank,Chair: Thomas Jordan, -0.75%, Meets March 25
The SNB interest rates are the world's lowest at-0.75% due to the highly valued Franc. As an export driven economy they hate a strong CHF and are doing their best to make it as unattractive as possible. The market largely ignores this and keeps buying CHF on risk aversion which has been here in one form or another since around 2008/2009 if the EURCHF chart is anything to go by.
In December the SNB left rates unchanged. The inflation forecast was unchanged from Septembers forecast in terms of the longer term view. . The forecast for 2020 was -0.7% (vs -0.6% forecast in September) and +0.0% for 2021 and +0.2% for 2022. In short they see the outlook for 2022 remaining the same. The SNB projected that GDP would shrink by 3% in 2020. Growth for 2021 is seen between 2.5% -3.0%. The statement struck a tone of optimism vs 'who knows what will really happen' with upside and downside risks stated.
The SNB continue to intervene in the FX markets. 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. However, if the reflation trade really takes off in earnest then expect EURCHF buyers. There is not really much going on with the SNB that is tradable. The CHF remains best used as a risk on/ risk off go to currency. However, in my eyes, it plays second fiddle to the JPY.
For more details on the sight deposits check out SNBCHF.com, This site called the removal of the floor back in 2015, so well worth checking out.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets March 19
The Bank of Japan met January 20 and 21 The Bank of Japan is another very bearish bank and the latest meeting saw no major shift.The Bank, like others, warned of downside and upside risks as they too struggle to see into the future.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 higher. Fiscal median forecast was 3.9% for next year from 3.6%. Core CPI was -0.4%. 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. There had been chatter about whether the BoJ would exit their large scale purchases of ETF's and loosen their grip on yield curve control. This was always going to be the wrong time for this and Kuroda said, 'It's too early to exit from our massive monetary easing programme at this point'. He added, 'Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now'. Fair enough, point taken.
You can read the summary of opinions here.
Reserve Bank of New Zealand, Governor Adrian Orr,0.25%,Meets February 24
The RBNZ kept the asset purchase programme maintained at $NZD100 billion and introduced the new Funding for Lending Programme as planned at their meeting last year. The RBNZ maintained projections 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 was expected 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 this year. However, it was not just the more optimistic outlook that caused the market to buy NZD out of the last rate meeting. It was 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 did go negative banks could 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 RBNZ had needed to keep up some sense of why this is an important move at their last 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 move rates negatively. Inflation pressure has been rising recently with 2 year inflation expectations coming at 1.89% vs 1.59% recently and the outlook for New Zealand looks pretty robust given their excellent handling of the COVID-19 crisis. The latest chatter is moving towards bond purchase tapering and rates rises next. Been a turnaround story helping the NZD higher against weaker currencies and negative rates are now a tail risk rather than a base case.
