Central Bank Policies

23rd July 2021

RBA MINUTES REVIEW: The RBA Minutes from the July meeting stated that the Board remains committed to maintaining highly supportive monetary conditions and will not raise the cash rate until inflation is sustainably within the 2%-3% target. The Bank's central scenario is that conditions for a rate hike will not be met before 2024, and meeting rate hike conditions will require the labour market to be tight enough to spur materially higher growth in wages. The recovery in the labour market continued to be faster than anticipated, but the minutes added that outcomes for the nominal side of the economy have not been as positive. The release noted that the bond purchase program had been one of the contributors underpinning the accommodative conditions needed for economic recovery from the pandemic. Meanwhile, members agreed that there should be flexibility to raise or lower weekly bond purchases in the future due to high uncertainty about the outlook. Although a pickup in inflation and wages growth is anticipated, it is likely to be only gradual and modest. The minutes are somewhat stale given the lockdown announcements across the Aussie state of Victoria that were announced after the meeting. Since then, desks have been cutting the economy's GDP growth forecasts. There are now mounting calls for the RBA to backtrack on its QE taper, with some even suggested that more bond buying may be needed to weather the latest COVID wave.

ECB REVIEW: As expected, the ECB stood pat on rates and the sizes of its bond buying operations (PEPP and APP). In its newly formatted policy statement, the Governing Council adjusted forward guidance on interest rates to reflect its new symmetric 2% inflation target vs. its previous "close to, but below 2%" approach. One of the more interesting nuances of the statement was that its inflation mandate will be targeted via actual inflation outcomes and that rates remain at present or lower levels until "it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon". Emphasis on the projection horizon and on a durable basis was received dovishly by the market alongside the ECB stressing that the medium-term outlook for inflation is still well below the Governing Council's target. Those looking for any clues on the future of the PEPP and APP purchases will have been left disappointed with the statement reaffirming that PEPP will run until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over whilst forward guidance was maintained on APP. President Lagarde had hinted that PEPP could transition to a new format when it draws to a close, something which has been inferred as meaning a bolstering of APP in 2022, however, no indications of this were offered up by the statement and Lagarde later remarked that the matter was not discussed. At the press conference, Lagarde emphasised that the revised guidance on rates underlines the Bank's commitment to maintain a policy stance that will help it meet its inflation target, whilst acknowledging that as it stands, the medium-term outlook is still below target. On the economic outlook, the ECB judges that the economic recovery remains on track with activity seen returning to pre-crisis levels by Q1 2022, that said, the Delta variant poses a source of uncertainty for the outlook. In terms of the unanimity of today's adjustments, Lagarde stated that there was some 'marginal' disagreement at the meeting on the calibration of some aspects of forward guidance but refrained from providing details. Elsewhere, Lagarde continued to stress that the new forward guidance did not infer "lower for longer", whilst remarking that rates are at the effective lower bound. This might have been a potential olive branch to some of the hawks on the Governing Council, however, given the tweak to forward guidance and the inflation outlook it's hard to suggest that the ECB is not set for a lower rate profile than it was ahead of the strategic review.

FOMC POLICY DECISION (WED): The main focus will be the central bank's discussions on how to scale-back the rate of its asset purchases, currently running at a clip of USD 120bln/month (USD 80bln Treasuries, USD 40bln MBS). Reports indicate officials will receive formal briefings from staff on the strategies for reducing bond purchases, and Powell will likely be quizzed on these in his Q&A. Whatever the strategy, the eventual approach that the Fed adopts will likely depend on the progress of the economy in reaching the Fed's goals; some officials have cautioned against a tapering process which is fixed on 'autopilot', indicating a desire for flexibility. Analysts see the Fed taper being announced somewhere between September 2021 through June 2022, and many expect it will be reduced by around USD 10bln per month, implying that the taper process could last for around one year or so. And in terms of future sequencing of policy, many assume the Fed will allow asset purchases to be tapered fully before considering any rate rise, which puts a possible H2 2022 rate hike in play (all dependent on the progress of the economy, of course). Another debate on asset purchases is whether the Fed will taper MBS purchases quicker than Treasury purchases, which some have called for given the heat in the housing market (note: influential Fed officials have argued that both MBS and Treasury purchases have had similar impacts on the economy). Elsewhere, Powell will again face questions on whether he will serve a second term (his current term expires next February), to which the Fed chair will graciously deflect the line of questioning. This week, WSJ suggested that he is viewed by some inside and many outside the administration as the front-runner for the job, although the progressive and female Governor Brainard is also in contention. An FT editorial this week has called for Powell to be handed a second term, arguing that 'if it ain't broke, then don't fix it'.

BOJ SUMMARY OF OPINIONS (WED): The BoJ will release the Summary of Opinions from its July 15th-16th meeting next Wednesday, which lacked any major fireworks as the central bank kept policy settings unchanged as expected with rates kept at -0.10% and 10yr JGB yield target maintained at 0.0%, although it adjusted its Outlook Report forecasts and confirmed to offer funds at zero interest for the scheme to combat climate change but will not offer an interest reward to banks that tap into the scheme. The BoJ's statement reiterated that Japan's economy remains in a severe state but is picking up as a trend and is likely to recover although activity remains low compared to pre-pandemic levels, while it will not hesitate to take additional easing steps if necessary. Furthermore, the BoJ reduced its Real GDP growth forecast for the current fiscal year to 3.8% from 4.0% but upgraded its fiscal 2022 forecast to 2.7% from 2.4%, and raised Core CPI forecasts for fiscal 2021 and fiscal 2022 to 0.6% from 0.1% and to 0.9% from 0.8%, respectively. The adjustments in the outlook forecasts were not surprising as several press reports had anticipated the central bank to reduce GDP growth forecasts this year due to the recent state of emergencies in key Japanese prefectures including Tokyo, and which was offset by a hike in next fiscal year's growth projection, while the increase in Core CPI estimates had also been flagged by sources and was due to the recent rise in energy prices. Nonetheless, participants will still scrutinize the upcoming release for further clues on the central bank's thinking, although like the actual policy meeting itself, the Summary of Opinions aren't anticipated to be a major driver for price action.

RBNZ POLICY REVIEW (LAST WEEK): The most crucial change in the statement was the end-date set for the Large-Scale Asset Purchase (LSAP), with the weekly buying poised to end on July 23rd - with the release explicitly dubbed "Monetary Stimulus Reduced". The OCR was kept unchanged at 0.25% as expected. The Committee "agreed that the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate", the statement said, whilst noting that "recent data indicate the New Zealand economy remains robust" and reiterated that there would be near-term spikes in headline CPI over Q2 and Q3. The RBNZ tilted more hawkish than had been expected. Thus, a bandwagon of banks and analysts brought forward their forecasts for an OCR hike, including the likes of ANZ, ASB, BNZ and eventually Westpac - with the latter initially reiterating its November call before revising it to August. OIS markets priced some 70% chance of such a move. Westpac acknowledged the RBNZ was more hawkish than expected, and the RBNZ has significantly upgraded its economic assessment in lockstep with data. "...the strength of demand and rising capacity pressures have increased the risk that more persistent inflation pressures emerge." Westpac believes, "Our view is that the reduction in purchases itself is less important than the signal that it sends - monetary policy is going to get tighter." Furthermore, Q2 CPI surpassed expectations and the the top end of the 1%-3% target band for the first time in 19 quarters. This subsequently resulted in Overnight Indexed Swaps pricing in around a 90% chance of a hike next month and nearly two hikes for this year, although Westpac is now calling for a total of three hikes by year-end.

BOC REVIEW (LAST WEEK): The Bank of Canada left rates unchanged at 0.25%, its estimate of the output gap was unchanged, and it also left guidance unchanged that it sees rates being left at current levels until sometime in the second half of 2022; the maintenance of this guidance perhaps disappointed those looking for a more hawkish BoC. RBC's analysts said "it would have been difficult for the bank to surprise hawkish with markets having increased BoC rate hike expectations since the Fed's June meeting". The Bank did confirm expectations on asset purchases, however, tapering weekly purchases by a further CAD 1bln/week, taking the pace to CAD 2bln/week. Ahead of the meeting, some anlaysts had suggested that a CAD 1bln/week taper would set up expectations for the BoC's asset purchases to end at the September meeting. At the Press Conference, Governor Macklem reiterated that adjustments in the asset purchases reflected continued progress towards the recovery and the bank's increased confidence in the strength of the Canadian economic outlook and that decisions regarding further adjustments to the pace of net purchases will be guided by the Governing Council's ongoing assessments of the strength and durability of the recovery, and noted if the economy evolves broadly in line with their outlook, then overtime, they will not need as much QE and further adjustments will continue to be gradual. The MPR forecasts saw a downgrade to the 2021 GDP forecast to 6.0% (exp. 6.2%, prev. 6.5%), although this was more than offset with a jump in 2022 GDP of 4.6 % (exp. 4.0%, prev. 3.7%), while 2023 was upgraded a touch to 3.3% from 3.2%. Its CPI forecasts saw 2021 and 2022 revised higher, as expected, although it is expected to moderate a touch in 2023; inflation in 2021 is seen at 3.0% (prev. 2.3%), 2022 at 2.4% (prev. 1.9%) and 2023 at 2.2% (prev. 2.3%). The output gap estimate was left unchanged at -3 to -2% and estimates of when the output gap will close remain particularly uncertain. On inflation, the Governor holds the view that sharp prices pressures should prove transitory for three reasons: the breakdown of individual items driving inflation shows temporary issues (notes low base effects), slack in the economy, and evidence of firms on pricing in recent surveys. Macklem did however note that supply chain bottlenecks as a new factor that will prolong the temporary inflation, however. On the Canadian dollar, he expects it to remain stable but if it were to move higher than forecast it would put more competitive pressure on exports. Macklem also noted the outlook is not that different from the one issued in April.