As widely anticipated, the FOMC left the target range for the Fed funds rate unchanged at between 0.75- 1%. Although the accompanying statement was largely unchanged from the previous month, the implications were important in light of the slowdown in the first quarter. While acknowledging the recent weakness in growth and inflation, policymakers attributed it to 'transitory effects'. The downplaying of 1Q17's disappointments underpinned the Fed's determination to carry on its normalization plan. The FOMC maintained its economic outlook and the gradual rate-hike approach. We continue to expect two more rate hikes this year with one coming in June.
As the market had widely anticipated, BOC has increased the overnight rate target, for the first time in 7 years, to 0.75%, from the historical low of 0.5%. The Bank Rate and the deposit rate rose to 1% and 0.5% respectively. Policymakers acknowledged the improvement in macroeconomic data, noting that the central bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy had been improved. Although inflation has remained soft, BOC judged that it is temporary and would reach the target by the middle of 2018.
We have got a more hawkish FOMC and BOE this week. For the former, policymakers raised the policy rate by +25 bps, as expected, and laid out detailed plans to unwind the balance sheet. For the latter, BOE left the Bank rate unchanged at a record low of 0.25%. Yet, the members' division on the monetary policy widened the most in 6 years with Michael Saunders and Ian McCafferty joining Kristin Forbes in support of a rate hike of +25 bps. The tug of war on interest rate differential results in higher volatility in GBPUSD. After BOE's announcement, GBPUSD erased earlier loss from an intra-day low of 1.2688 and rallied to 1.2795, before retreating again. The selloff of EURGBP widened with the pair plunging to a one-week low of 0.8721. ECB earlier this month refrained from talking about tapering and reaffirmed that it would extend QE purchases, if necessary.
RBA minutes for the April meeting came in less upbeat than the March one, underpinning concerns over developments in Australia's labor and housing market. Policymakers concluded by noting that "developments in the labour and housing markets warranted careful monitoring over coming months". Note, however, that the meeting was held ahead of the release of the March employment report which showed that full-time payrolls rose the most in nearly 30 years. Aussie slumped after the minutes to a 3-day low 0.552.
The RBA minutes for the October meeting reaffirmed the market that the central bank is in no hurry to increase interest rates. Policymakers stressed that rate hikes, or other kinds of monetary policy normalization, in other major economies do not necessarily imply that the RBA would follow suit anytime soon. The RBA remained upbeat in the domestic economic outlook, staying confident in the employment market conditions. Yet, it was still weary of subdued inflation. As usual, the central bank continued to warn of the strength in Australian dollar.
As widely anticipated, RBA left the cash rate unchanged at 1.5% in November. As we await Friday' Statement of Monetary Policy, policymakers revealed at today' statement that the macroeconomic guidance has stayed largely unchanged. In short, policymakers remained upbeat about the growth outlook, although they expressed concerns over household spending and soft inflation. Despite recent weakness in the Australian dollar, RBA reiterated the warning that higher exchange rate would lead to slower growth and inflation. Given the overall unchanged tone of the central bank, we retain the view that RBA would keep the policy rate unchanged at least until 1H18.
ECB President Mario Draghi poured cold water onto hawks who had anticipated a more upbeat policy statement following recent improvement in macroeconomic data. However, the central bank downgraded the inflation forecasts for three years despite upward revision on GDP growth. The forward guidance was slightly less dovish with the reference "or lower" removed. Honestly, all of us understand that, at the currently exceptionally low (some are negative) interest rates, further rate cuts would offer little help to the economy. Notwithstanding expectations that the ECB would begin preparing the market over QE tapering, the central bank maintained the easing bias, reiterating the commitment to accelerate its monthly asset purchases if necessary. The single currency remains under pressure after dropping to a one-week low against the US dollar.
As expected, BOC left its overnight rate unchanged at 0.5% in January. Yet, it delivered a more dovish than expected message and sent CAD to a one-week low against USD. At the press conference, Governor Stephen Poloz revealed that 'Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy'. He suggested that further rate cut cannot be ruled out of US' protectionist policy puts BOC's inflation target at risk.
The FOMC minutes for the September meeting anchored the Fed's stance to hike policy rate for one more time this year. While the views on economic growth developments remained broadly unchanged from previous meetings, the members appeared more concerned over the inflation outlook. The minutes included detailed discussions on the impacts hurricanes Harvey, Irma, and Maria. Yet, they were expected to have limited impacts on US growth and inflation. The market has priced in almost 90% chance of a rate hike in December. The bet shows little change after the release of the minutes.
FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of +25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be 'data dependent'. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate'. The market has only priced in 2 rate hikes this year, although the December dot plot signaled there might be 3. CME’s 30-day Fed fund futures suggested a 17.7% chance of rate hike in March, down from 20.3% prior to FOMC meeting. Yet, they priced in a 38.8% chance in May, compared with 37.7% the day before the meeting.
As expected, RBNZ left the OCR unchanged at 1.75%, following three rate cuts in 2016. The policy statement has changed to a more neutral tone from an accommodative one previously. Yet, the central bank's rate hike forecasts stay at a slower pace than what the market has priced in. Policymakers acknowledged that economic growth has 'increased as expected and is steadily drawing on spare resources'. The outlook remain s positive. It also acknowledged the return of headline CPI to the target band, and judged it would gradually move to the midpoint of the band. We expect the OCR would stay unchanged for the rest of the year.
As expected, RBA left the cash rate unchanged at 1.5% in March. Despite few changes in the monetary statement, policymakers appeared more upbeat on both the global and domestic economic outlook. The major change on RBA's view was on the housing market with the central bank now seeing the conditions 'strong' and prices 'rising briskly' in some markets. On the monetary front, RBA acknowledged further rate hike is coming in the US and 'there is no longer an expectation of additional monetary easing in other major economies'. With no explicit guidance on RBA's monetary policy outlook, we see it maintain a neutral bias with future rate decision dependent on incoming data.
The minutes for the June ECB meeting turned out more hawkish than expected, sending EURUSD to a 3-day high of 1.1397 and Europe's Stoxx 600 stock index to a 11-week low 378.45. The minutes unveiled that policymakers had discussed removing the guidance on the bond asset purchase program (QE), if necessary. Policymakers just shrugged off recent weakness in headline inflation as core inflation continued to climb higher.
BOC appeared more confident over the economic growth outlook, although it maintained the policy rate unchanged at 0.5% in April. Policymakers upgraded the GDP growth forecast for this year amidst strong housing market activities in the first quarter, but revised lower the figure for 2018. It also revised mildly higher the inflation outlook, though. The central bank cautioned over the uncertainty of trade relations with the US and stressed that material slack remained in Canada. On the monetary policy, Governor Stephen Poloz described the stance as 'decidedly neutral' as the members weighed the improved economic developments against the uncertain trade policy. We expect the policy rate to stay unchanged at 0.5% for the rest of the year. The loonie strengthened around than +0.5% Wednesday as Canadian economic outlook improved. Yet, the magnitude of the gain was mainly due to USD's weakness as US President Donald Trump complained that the greenback is too strong and reiterated his preference of low interest rate policy.
BOE voted unanimously (9-0) to leave the Bank rate unchanged at 0.25% and the asset purchases program at 435B pound for UK gilts and 10B pound for non-financial GBP investment-grade corporate bonds. The members revised the growth forecasts significantly higher but left the inflation outlook largely unchanged. The latter was mainly due to the judgment that the labor slack was more than previously expected. Despite stronger growth outlook, Governor Mark Carney warned of the uncertainty over Brexit, cautioning that "there will be twists and turns along the way". While he reiterated that "we can see scenarios in either direction" for policy, we expect BOE to leave the monetary policy and the QE program unchanged at least in the first half of the year.
Investors viewed Fed Chair Janet Yellen's testimony before the Senate Banking Committee as modestly hawkish. As such, expectations for a March rate hike rose modestly while Treasury yields climbed higher. While reiterating that all meetings are 'live' for a rate hike, Yellen warned that waiting too long to remove accommodation would be unwise'. Meanwhile, she cautioned over the uncertainty over the economic policy under Donald Trump's administration. Yellen emphasized the Fed's monetary policy stance is not based on 'speculations' about fiscal policy. The economy's 'solid progress' is what is 'driving the policy decisions'.