Central Bank Scorecard

Divergences in central bank guidelines continue to drive the global investment environment. This holds true not only across Developed Markets, however Emerging Markets as well.  We thought it would be helpful to review our expectations of central bank policies going forward.

December is shaping up to be one of the most important months for monetary policy in the last few years.  To date, it is spelling out dollar strength. The Fed is backing up its intention to hike this year, the ECB is actually considering easing, while the BOJ could defy expectations for further reducing.  Farther afield, most other central banking institutions have an easing bias.

Developed Markets

The FOMC next meets on December Sixteen.  Barring a significant surprise on the data front, a rate hike by the Fed then is very much in play.  At the Oct meeting, the FOMC played down the risks emanating from overseas, while recent comments through Yellen have reinforced the view that the Fed is prepared to follow-through using its intention to hike prices this year.  The US rates marketplace seems to be taking this to heart, as the 2-year yield has increased to 0.85%, a new higher for this year and matching the February 2011 highs.  Some argue against the December hike on specialized grounds, given the proximity towards the end of the year.  However, the Fed has taken action in the month of December.  This hiked rates in December 2004 and December 2005, for example, and it cut rates within December 2001 and Dec 1995.

The European Central Financial institution next meets on December 3.  Hopes are operating high for an announcement of additional monetary stimulus after Draghi grown the seeds of anticipations in his press conference following a last ECB meeting.  Although the odds of the bank taking action are higher, we caution against getting too confident about it.  Very first, it is not clear that there is a general opinion.  Second, the recent economic information suggests that, on balance, the development continues apace.  Core inflation is running at 1.0% year-over-year, that, while soft, is not signaling the deflationary spiral.  In short, the economic perspective does not seem consistent with the sense of urgency that Draghi seemed to express at the October ECB meeting. 

The Financial institution of Japan next fulfills on November 19.  It left policy on maintain last week, which disappointed lots who had anticipated an growth of its asset purchase strategy.  Contrary to what some describe as a "technical” definition, officials do not appear to regard what Asia is experiencing as a recession.  Still, continued weakness within Q4 and the risk that headline inflation continues to soften will likely keep speculation running high for addition monetary reducing either late this year or early next.  While Governor Kuroda offered assurances that further reducing will come if necessary, we think marketplaces may be overestimating the odds of it occurring imminently. 

The Bank of England subsequent meets on December Ten.  Earlier today, the BOE stored the key rate at 0.5% with an 8-1 vote.  The bank wants inflation to stay below 1% into H2 2016, which many interpreted as dovish.  The bank also trimmed its 2016 GDP forecast to 2.5% from 2.6%, and highlighted drawback risks from EM.  The actual BOE is still widely expected to be the second major central bank to hike rates after the Federal Reserve.  This anticipation helps sterling outperform most other major foreign currencies on the divergence hypothesis.  However, the perceived gap between the Fed'utes move and the BOE's transfer can be several months and therein lays sterling's vulnerability. 

The Norges Financial institution next meets on Dec 17.  The central bank kept rates steady at 0.75% today, as expected, however, many saw Governor Olsen’s comments because relatively less dovish.  In particular, he said the bank did not discuss an interest rate cut today.  The statement highlighted the effects of the drop in oil prices, but it also noted that, “the krone trade rate has been weaker compared to projected, and a more expansionary fiscal policy will contribute to fuelling interest in goods and services.”  On balance, we think that the bank will retain its dovish bias and a decline in the next few meetings is unquestionably on the table.

The Riksbank next meets upon December 15.  Deflationary risks continue and the Riksbank is still in easing mode, having extended it’s bond purchase program in the October meeting.  Many are still looking for further stimulus forward, and believe that a rate reduce will happen. 

The Bank of North america next meets on December 2.  The unexpected political election of a Liberal majority government changes the policy mix in Canada.  Fiscal policy will shift from a small surplus to some small deficit.   This may try taking some pressure off monetary coverage, though with the economy recuperating after the difficult first fifty percent, the Bank of Canada’s mini-easing cycle was likely over even before the electoral outcome.  For now, we have seen steady rates.

The Reserve Financial institution of Australia next meets on December 1.  This left rates steady at 2.0% earlier this week, but some forecasters had expected a 25 bp cut.  Governor Stevens left the door open for further easing in recent comments, but also mentioned “prospects for an improvement within economic conditions had firmed just a little.” The next meeting will likely be a close call.  Right now, about a third of the analysts polled locate a 25 bp cut.  Strong domestic credit growth may have bought the RBA some time, but further softness in the information would likely push it into cutting rates again. 

The Reserve bank of New Zealand next meets on December 10.  Markets widely expect it to cut rates by 25 bp to 2.50% then.  Recent data support this view.  The actual Q3 employment report was on the soft side, with the unemployment rate holding at 6.0% only because of the drop in involvement rate.  There was also a horrible milk auction earlier this 7 days, along with a wider than expected September trade balance, that does not help the outlook.

Emerging Markets

Latin America

The subsequent policy meeting for Brazil is on November Twenty five.  Analysts expect no change.  COPOM kept rates steady last month at 14.25%, and the moments suggest that further tightening is not likely (for now).  However, market prices now suggests a Twenty five bp hike to 14.5% at that meeting, followed by 2 more 50 bp hikes in Q1 2016 (January 20 as well as March 2) that would go ahead and take SELIC rate to 15.5%.  That is very aggressive, and is almost certainly due more to risk aversion pushing up the local yield contour than to expectations for actual hikes.  IPCA rose 9.77% y/y in mid-October, well above the 3-7% target range and still rising.

The next policy meeting for Chile is on November 12.  Analysts anticipate no change.  CPI rose 4.6% y/y in September, and expects to fall to 3.9% in October.  If so, it would be the very first time since March 2014 that rising cost of living is within the 2-4% target rate.  The last move by the central bank was a 25 bp hike to 3.25% in October which started the tightening cycle, but we know they talked about no hike.  With the economy sluggish and inflation falling, there is no expectation of an intense tightening cycle.

The next policy meeting for Colombia is on November 27.  The last transfer was a bigger than expected Fifty bp hike to 5.25% in October, after starting the tightening cycle with a Twenty five bp hike in Sept.  Inflation was 5.35% y/y within September, and expects to rise to 5.6% y/y in October.  If that’s the case, it would be another new period high and further above the 2-4% target range.  Indeed, inflation continues to be above the target range since January 2015. 

Banco de Mexico next meets on December Seventeen.  At its policy conference last week, the central bank kept rates steady at 3% but warned of pass-through risks from the weak peso.  Mexico sticks out as a regional exception in terms of inflation risks.  Inflation is below the 3% target, and is presently at an all-time low just below Two.5% and still falling.  Banco de South america warned at the beginning of this year that it would likely hike rates pre-emptively.  That has not come, but we all do see some risk that South america hikes rates immediately after the Fed does. 

The next policy meeting for Peru is on November 12.  Analysts anticipate no change.  The last transfer was a 25 bp hike to 3.5% in September which started the tightening period.  Inflation was 3.66% y/y within September, still above the 1-3% focus on range.  However, it has fallen from the 4% y/y peak in July and disinflation should continue.  The actual economy remains sluggish and thus an aggressive tightening cycle seems unlikely. 

EMEA

The next policy conference for Czech Republic is on Dec 16.  Today, it remaining policy steady but altered its forward guidance somewhat.  It now sees current policies maintained until “around” the end of 2016.  Previously, it said until “at least” H2 2016.  Deflation risks continue, along with CPI coming in at only 0.4% y/y in September.  If the data turn down again, we would not eliminate an adjustment to the floor itself, rather than just the forward assistance.

The next policy meeting for Hungary is on November 17.  No change is expected, and contains kept rates at 1.35% since the last 15 bp cut in July.  However, the financial institution has been getting more dovish.  The bank lately moved the horizon with regard to steady rates out to no more 2017.  Central bank Vice President Nagy later on said it could hold prices steady into 2019.  He then said earlier this week that the financial institution will ease policy further with “non-conventional” tools rather than rate cuts.  Deflation risks continue, along with CPI coming in at -0.4% y/y in September.

The next policy meeting for Israel is actually on November 23.  Steady rates are expected.  Furthermore, the potential risks of a dovish surprise appear to have dropped after Governor Flug last meeting downplayed the need for more easing.  The last transfer was a 15 bp reduce to 0.10% in Feb.  CPI contracted -0.5% y/y in September, and it is well below the 1-3% target range.  The economy remains fragile, but for now, it seems the fragile shekel will be the main source of stimulus for now.

The next policy conference for Poland is upon December 2.  No change is expected, and it has kept rates at 1.5% since the final 50 bp cut in March.  While the bank is upon hold for now, it will likely get more dovish next year when we will see the replacement of virtually the whole MPC as their terms expire in Q1.  The incoming Law and Justice government has already indicated a desire to stack the actual MPC with a more growth-oriented staff, so further easing seems most likely in 2016.

The next policy conference for Russia is upon December 11.  The main bank has kept rates steady at 11.0% because the last 50 bp cut in July.  CPI inflation has decelerated two straight months, but remains too high at 15.6% y/y within October.  We think steady coverage is the right decision considering rising inflation and the fragile ruble.  The central bank suggested at its last conference that easing could happen within 2016 if the inflation trajectory enhances as it expects. 

The South African Reserve Bank next fulfills on November 19.  It is the only notable hawkish central financial institution in this region, but it has been unstable of late.  With the economy still weak, we think the SARB will find it hard to continue its tightening cycle after restarting this with a 25 bp hike to 6% back in July.  Analysts are looking for a continuation from the tightening cycle, roughly at a pace of 25 british petroleum per quarter.  This hits us as too intense, and we believe that political facts (unemployment above 25%) and social unrest will prevent this scenario from unfolding.  Fiscal policy is tightening, putting more headwinds on the economy.

The next policy meeting for Turkey is on November 24.  Steady rates are expected, and the last move was a Twenty five bp cut to 7.5% in February.  Inflation has begun decelerating, falling to 7.58% y/y in October.  It may move back again within the 3-7% target range in the coming months.  With political uncertainty lower after the The fall of 1 elections, the bank may come under pressure to resume rate cuts.  Indeed, press reports recommend the AKP is considering a big change to the central bank’s framework to give it a growth mandate, rather than an inflation one. 

Asia

With China data still softening, the PBOC is likely to continue its reducing cycle.  The last move would be a 25 bp cut in its policy rates and Fifty bp cut in reserve requirements in October.  CPI rose to at least one.6% y/y in September, down through 2.0% in August, that was the highest level this year.  Still, inflation is not the main adjustable in the PBOC’s reaction function.  With the growth outlook still uncertain, we expect further easing by a combination of policy rate cuts and book requirement cuts.

The next coverage meeting for India is actually on December 1.  Price pressures remain low, with CPI rising 4.4% y/y in September, near the middle of the 2-6% target variety.  WPI contracted -4.5% y/y, pointing to no pipeline pressures. Governor Rajan, however, can also be very much focused on banking change and legal issues pertaining to the independence of the central financial institution.  Rajan has also made it clear that it fiscal discipline is an important element in the reaction function of the RBI.  Therefore the easing cycle will be steady.  The last move was a 50 bp cut in its policy rates in September. Also of note, regional elections are ongoing in India along with a strong result for ruling BJP would help ensure that reforms would continue moving and fiscal outlook under check.

The subsequent policy meeting for Indonesia is on November 17.  Bank Indonesia faces the quandary.  Like the rest of the area, the economy is slowing down.  However, inflation here is too high to allow for easing near-term, especially with the rupiah weakening steadily.  As such, the bank is likely to say on maintain for now.  CPI rose 6.25% y/y in October, the lowest since November 2014 but still above the 3-5% target range.  Easing in 2016 is possible if disinflation continues.  The bank is primarily focused in currency stability right now and is debating new money market instruments to deal with extra funds.  However, it has taken some macroprudential steps to boost financing.  The last rate move would be a 25 bp cut in order to 7.5% in February.

The next policy meeting for South korea is on November 12.  Although core CPI remains raised at 2.1% y/y, headline is actually running at a relatively benign 0.9% y/y in October, and it is below the 2.5-3.5% target range.  We suspect the bank may prefer to see the reaction from the first Fed hike prior to pulling the trigger.  The BOK will gauge effects of fiscal stimulus before it functions again.  The last move was a 25 bp cut to 1.5% in June.

The next policy meeting for Malaysia is upon January 21.  It just stored rates steady today, however the tone of the statement seemed to be more dovish than in the past.  "Downside dangers to growth remain higher.  The performance of the Malaysian economic climate continues to be affected by the weak external environment" and it added which private consumption expects in order to moderate.  We think it will lean more dovish and perhaps ease within 2016 if the slowdown continues.  The weak ringgit is a constraint on cutting rates near-term.  The last move was a 25 bp hike to 3.25% in July 2014. 

The next policy meeting for the Philippines is on November Twelve.  Data has come in on the firm side recently, despite the external headwinds.  A lot of the country’s economic performance will hinge upon President Aquino’s fiscal plans and implementation of infrastructure expenditures.  Inflation remains really subdued at 0.4% y/y within October, well below the 2-4% focus on range.  However, upside risks are present due to the El Nino effect and its pass-through.  Monetary policy seems to be roughly in balance at the moment.  The last move was a 25 bp hike in its policy rates in September 2014. 

The next semi-annual policy meeting for the Monetary Authority of Singapore is in April 2016.  Singapore is actually experiencing deeper deflation risks.  CPI fell -0.6% y/y in September, and is the eleventh straight month associated with deflation.  Even core is too low at 0.6% y/y.  The MAS does not have a good explicit inflation target, however it should be concerned that deflation risks remain strong.  The economy is slowing, and we think the MAS will ease coverage at its April meeting by adjusting its S$NEER trading band again.  No day has been set yet.  The actual MAS reduced the rate of S$NEER understanding at the October meeting, that was more timid than numerous expected.  MAS had been on hold since the last emergency intra-meeting reducing move back in January.

The subsequent quarterly policy meeting with regard to Taiwan is in late December.  We expect another rate cut then after the 12.Five bp cut to 1.75% at the September 24 meeting began the easing cycle.  Information have come in very soft since the September meeting, with imports, exports, IP, sales, and Gross domestic product all showing further weak point.  CPI rose 0.3% y/y in both September and October, but deflation risks remain in place.  Of course, the actual slowdown in China is paramount variable here.

The next coverage meeting for Thailand is The fall of 4.  No change is expected.  It seems as if the bank is actually leaving further stimulus at the disposal of the government and to the less strong baht.  Despite headline CPI falling -0.8% y/y within October (the tenth directly month of deflation), the main bank will probably want to see how the actual fiscal measures impact the broader economy (and possibly wait for the Fed to move) before committing to additional action.  The last move would be a 25 bp cut to at least one.5% in April.

Divergence Update: Global Monetary Policy Cycles  is republished with permission from Marc in order to Market