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RANsquawk Weekly G10 Central Bank Monitor 28 July 2017

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FEDERAL RESERVE

  • While rates were kept unchanged, and the FOMC hinted that balance sheet normalisation could begin ‘relatively’ soon, it was the central bank’s tweak to its views on inflation which were seen as dovish, dragging the probability of another Fed hike in 2017 to just over 50% from around 61% before the Fed’s update.
  • Previously, the Fed had characterised the inflation profile as “somewhat below 2%”, though the latest guidance dropped ‘somewhat’. Analysts at Barclays caution about reading too much into the new language: “We do not read this as a major softening in view, but instead see it as the committee facing facts of where inflation is versus where the Fed wants it to be, but that said, markets are likely to take a dovish signal from this language alteration, even if it’s merely descriptive in nature.” It is also worth noting that the Fed upgraded its guidance on the labour market, saying “job gains have been solid” (in June, it said that gains had ‘moderated’).
  • On balance sheet adjustment, there seems to be a consensus building behind a September announcement, with the actual ‘normalisation’ to begin the following month. The “relatively soon” language “is a slight change from June when the committee said it expected to begin runoff “this year” and, in our view, indicates the official announcement will come at the September FOMC meeting,” Barclays says.
  • However, what remains unanswered is how the Fed will sequence rate hikes with the balance sheet reduction. “The potential for doves, led by [Lael] Brainard, to stall the rate normalisation process once the balance sheet starts is real,” say analysts at IFR, citing a recent speech from Brainard that said once the balance sheet adjustment is underway, she’d reassess the progress on inflation before endorsing further rate hikes.

BANK OF JAPAN

  • The terms of hawkish BOJ policy board members Takehiro Sato and Takehide Kiuchi came to an end this week, and the two have been replaced by Goshi Kataoka and Hitoshi Suzuki, and the new members’ first policy meeting will be on 20-21 September.
  • According to analysis by Barclays, Suzuki is likely a sceptic on YCC – particularly NIRP – due to the impact on the earnings of financial institutions; meanwhile, Kataoka is said to be sceptical about the efficacy of YCC, while he is said to have advocated the effectiveness of QQE on “the basis of extreme monetarist arguments,” Barclays’ says.
  • Looking forward, depending on who replaces the Deputy Governor Kikuo Iwata, the emphasis of policymaking could tilt towards actual rates, rather than quantity of purchases, Barclays writes.

BANK OF ENGLAND

  • The Bank of England convenes for its quarterly ‘Super Thursday’ event this week, where it will issue its latest monetary policy decision, the minutes from the meeting, and its quarterly inflation report. While almost all of those surveyed expect the BoE to stand pat, analysts at Nomura are looking for a 25bps hike, although they do assign a 40% probably of the Bank remaining on hold. The last decision yielded a surprising 5-3 vote, although Forbes’ (a hawkish dissenter) term has now come to an end. Analysts expect dissenters McCafferty and Saunders to vote for a 25bps hike once again, with focus falling on chief economist Andy Haldane following a hawkish intra-meeting speech. As a result, analysts will focus on whether the vote split is 6-2, or 5-3, with newcomer Tenreyro expected to side with the majority this time out.
  • The BOE has appointed Sir Dave Ramsden as new Deputy Governor, formerly the UK Treasury’s chief economist. After the appointment of Silvana Tenreyro, all vacant positions on the MPC have now been filled (though Ramsden will take up his role after next week’s BOE meeting). HSBC notes that Ramsden is no stranger to the MPC and, as part of his role at the Treasury, has sat in on MPC meetings for the last several years, and will, therefore, need little time to get up to speed on the committee’s current debates.
  • In terms of Ramsden’s position on the hawk-dove spectrum, HSBC says it is difficult to place him. But with that being said, the bank notes that “he has been at the heart of the machinery of UK economic policymaking in recent years. This has been built around fiscal consolidation and ultra-loose monetary policy,” and HSBC doubts whether Ramsden will depart too far from this policy stance. It is also worth noting that Ramsden oversaw the UK Treasury’s Brexit analysis ahead of the Referendum on EU Membership, which did not strike an upbeat tone of the near-term outlook. Therefore, HSBC does not believe that he will join the dissenters on the MPC in the near future.

EUROPEAN CENTRAL BANK

  • The ECB’s Jens Nowotny has clearly taken encouragement from the improving economic fundamentals – particularly now that the tspaneat from deflation has been vanquished for now – and suggested that it would be “reasonable” for the central bank to begin tapering its asset purchases from the beginning of next year. He also added that the conversation about tightening policy at the ECB has begun.
  • Additionally, Nowotny suggested that the agreed with ECB’s Jens Weidmann, who previously suggested that the ECB could begin to take its foot off the accelerator (NOTE: Weidmann himself was keen to emphasise that easing off the accelerator was not akin to putting a foot on the brake).
  • Meanwhile, the euro continues its ascent, rising to the highest levels since early 2015; some now believe that it trades at levels that might cause some discomfort to ECB members. “By the time the ECB meets again, they may well find a euro is worth USD 1.20, which really won’t help their inflation forecast at all,” writes Societe Generale, “that will, in turn, complicate the path of policy and at some point, we’ll get an FX response.”

SWISS NATIONAL BANK

  • SNB’s Jordan spoke on Monday, reiterating that the CHF remains significantly overvalued and that the central bank will continue with FX interventions and negative rates. Although these comments were nothing new from one of the most dovish central banks, the CHF weakened dramatically tspanoughout the week, with EUR/CHF reaching its highest level since the removal of the EUR/CHF floor in January 2015.

BANK OF CANADA

  • There have been no comments from Bank of Canada officials during the week although officials within Canadian PM’s office are said to be concerned with the BoC moving too quickly, fearing that higher rates could lead to an economic downturn. Canadian PM Trudeau and Finance Minister Morneau have both declined to comment on the recent decision to hike rates but some government officials felt Poloz acted too soon.
  • Supporting the BoC’s most recent decision to hike rates would be the strong GDP figures released on Friday which showed 0.6% M/M growth, the seventh consecutive monthly gain. The overall economy has grown by 4.6% in the 12 months to May, the highest since 2000. “The robustness of the Canadian economy will likely allow the Bank of Canada to carry tspanough with another interest rate increase this fall,” writes TD Bank, “completing the removal of the 2015 emergency stimulus.”

RESERVE BANK OF AUSTRALIA

  • RBA Governor Philip Lowe this week echoed comments Deputy Governor Guy Debelle made at the tail end of last week, that the RBA is in no rush to “move in lockstep” with some other major central banks who have been talking, tight as of late. He drew on the example of when the Aussie’s were cutting rates, and suggested that the RBA had scope to remain accommodative while inflationary pressures remain subdued.
  • The RBA is, therefore, expected to keep rates unchanged at the 1 August policy meeting (NOTE: The Statement on Monetary Policy is due to be released on 4 August), and the market will be keeping an eye on the Governors statement, Westpac says. “No doubt the Governor will continue to ‘call out’ the labour market and the housing markets as the key areas of interest, and in that regard, the sentiment in the July Board Minutes and the Governor’s July Statement is likely to be repeated.”
  • Elsewhere, discussion around the neutral rate has gotten attention recently, with Debelle cautioning about reading too much into the central bank’s discussions around its level in the latest meeting minutes. Analysts at ANZ believe the rate is still too high at 3.5%, and estimates that the true range is between 2.25% and 3.25%.
  • It is also worth keeping an ear out for any comments relating to the value of the Aussie dollar. In their recent comments, Lowe and Debelle both hinted that they’d like to see the currency lower. Westpac points out that, since the last policy meeting, the trade-weighted AUD has jumped, and the spot rate has surged to over 0.80 against the US dollar; the bank notes that when the Aussie was trading around 0.76, Lowe repeated his call that an appreciating exchange rate would complicate Australia’s economic adjustment, and say that with the Aussie knocking around 0.80, this language is likely to strengthen.
  • The RBA’s SOMP due on 4 August will cover the forecast horizon tspanough 2019. Once again, the level of the Aussie may be a factor here, given that the previous set of forecasts assumed a trade-weighted level of around 64, while the latest level is around 5% above that figure, and this may see core inflation forecasts lowered. ANZ recalls an RBA Bulletin article from 2011, where the RBA stated that “10 per cent appreciation of the Australian dollar is estimated to lower the level of overall consumer prices by around 1 per cent over a period of around tspanee years,” and ANZ says that, on the face of it at least, the RBA’s forecast for core inflation at above 2% by mid-2019 could drop to less than 2%, “in which case, it will be difficult for the Bank to characterise core inflation as being in a 2-3% band by mid-2019.”

RESERVE BANK OF NEW ZEALAND

  • Assistant governor John McDermott this week said the NZ neutral rate has dropped below 4% to around 3.5%, while a lower NZD would help to rebalance New Zealand’s growth profile. Additionally, the Assistant Governor saw core inflation around the 1.4%, noting it’s move sideways over the last year.
  • “The RBNZ lightly poured cold water over expectations that interest rates may be hiked as soon as next year by saying that its own ‘core’ measure sees inflation running at around just 1.4%, while it now views current interest rate levels as less ‘stimulatory’ than it previously believed,” UOB’s analysts say.

NORGES BANK

  • Nothing of note from Norway.

RIKSBANK

  • Swedish GDP was released on Friday, and will likely have been welcomed by the central bank after smashing expectations, rising at its fastest pace since Q4 of 2010. The quarterly GDP growth figure was 1ppt higher than the Riksbank’s own forecast. Nevertheless, Torbjorn Isaksson of Nordea Bank writes that, “monetary policy is still dependent on inflation outcomes and the ECB.”

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