Today’s central bank decisions confirmed that the ‘high(er) for longer’ paradigm is stronger than it has ever been in this cycle. Banks that held some kind of benign neglect approach (Norges Bank, Bank of England) were forced to surrender, forced by unacceptably stubborn (core) inflation. Even the Turkish central bank made a U-turn in its unconventional approach, admittedly less pronounced than markets hoped for. The ones that were already convinced on the need for a longer period of restrictive policy (Swiss National bank) for now see no need to change tactics, even as their approach is gradually yielding results. In fact that was also the conclusion from the Czech national bank yesterday, as it kept ‘leaning against rate cuts’. An illustrative summary.
The Bank of England in a 7-2 vote reaccelerated the pace of rate hikes to 0.5 ppt bringing the policy rate to 5.0%. The market was still leaning toward a 25 bps hike. The BoE still expects inflation to decline significantly during the course of the year, but had to recognize that second round effects in domestic prices and wages are likely to take longer to unwind as ‘upside news in recent data indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand.’ Despite those big upside surprises it didn’t change its ‘guidance’ in a profound way. The statement still reads ‘The MPC will continue to monitor closely indications of persistent inflationary pressures … including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’. So no ‘unconditional commitment’ on further policy tightening. The BoE decision was a mixed bag for markets. The 2-y yield gains 3.5 bps, but long term yields are easing (about -3.0 bps for 5-30-y spectrum). Of course, today’s reaction is ‘conditioned’ by recent sharp rise, especially in short-term yields. Sterling whipsawed upon the BoE announcement, but finally returned to near unchanged levels in the 0.86 area.
The Norges Bank unexpectedly reaccelerated the tightening pace from 25 to 50 bps to 3.75% and raised the expected terminal rate from the 3.5% projected in March to 4.25%. Inflation came in much quicker than expected in May, remaining way above target while wages are set to grow faster this year than in 2022. Meanwhile the economy is holding up well, not least because of a tight labour market. All this led the Norges Bank to again revise inflation estimates across the policy horizon. Even at the very end, in 2026, inflation is seen above target still. Today’s bigger-than-expected hike also came as the Norwegian krone traded weaker than thought, fueling (imported) inflation. If inflation keeps surprising to the upside or the NOK to the downside (or both), the Norges Bank does not rule out an even higher peak policy rate. The krone in any case isn’t that impressed. EUR/NOK eases from 11.71 to 11.60. As a rough measure, EUR/NOK should stabilize around 11.50 to meet the Norges Bank 2023 target.
The Swiss National Bank (SNB) as expected raised its policy rate by 25 bps to 1.75%. Swiss May headline inflation eased to 2.2%. Core inflation even dropped to 1.9%. The decline was mainly due to lower prices of imported goods (especially oil and gas) and the strong franc. However, despite a higher policy rate path than envisaged in March, SNB raised its 2024 and 2025 inflation forecast to respectively 2.2% and 2.1% (from 2.0%) on second round effects, higher electricity prices and rents and inflationary pressures from abroad. With inflation holding above target over the policy horizon, SNB’s Jordan indicated that further tightening is mostly likely necessary. SNB also is prepared to support appropriate monetary conditions by taking action in the FX market as necessary (selling FX vs CHF). Still the franc today lost modestly against the euro (EUR/CHF 0.9830). However, this level probably is no concern for the SNB.
What a difference a governor makes. The new president of the Turkish central bank, Hafize Gaye Erkan, not only drastically shortened the monetary policy statement, she also made a U-turn in its content. The CBRT said it began the tightening process in order to establish the disinflation course. It raised the policy rate from 8.5% to 15% for starters, with as much tightening as needed to come until the inflation outlook improves significantly. The statement no longer mentions the liraization strategy, a set of unconventional policy measures (fiscal and monetary) through which Turkey tried to support its sliding currency. It’s another sign of authorities seeking a clean break with the previous administration. But markets want money on the table. The Turkish currency slid after the decision with the rate hike coming in below a 20% consensus. USD/TRY and EUR/TRY both hit a new all-time high near 24.50 and 26.90 respectively.