As we move through the final month of the penultimate quarter of the year, I thought it would be good to have a quick catch up on where the four major G10 central banks are at. It’s been a far busier summer than usual with ongoing trade disputes, political turmoil around Brexit and sharp moves in oil, equity and commodity markets which are all having a notable effect on the Fed, the BoE, the ECB & the BoJ.
The United States Federal Reserve
The Fed remains firmly on course to plow ahead with its projected path of gradual rate rises. At the last meeting, members discussed whether it might soon be appropriate to stop referring to the bank’s monetary policy approach as “accommodative”. Alongside this, the meeting minutes from the bank’s August meeting also saw members agreeing that “it would likely soon be appropriate to take another step” in raising interest rates.
While the Fed acknowledges the potential negative consequences of a prolonged trade war the bank noted that business conditions in the US have not yet been affected and economic data continues to highlight strength, keeping the Fed’s view intact. With this in mind, the market is currently pricing a September rate hike of .25% followed by one further rate hike of .25% in December.
The European Central Bank
In June, the ECB announced that it would scale back monthly quantitative easing purchases to 15 bln EUR from September 2018 and cease purchases altogether by year-end. Following this announcement, the central bank has been out of the spotlight and, provided there are no major data upsets or inflation developments, the ECB will remain on auto-pilot throughout the rest of the year.
If the ECB remains on course with its current forecasts and winds down QE by year-end, the market will then turn its focus to the timing of the first-rate hike with Draghi having recently said that rates will stay at current levels until “at least summer 2019”. Unless data takes a stark turn for the worse the market is will be looking for either a September.
The Bank of England
Following the BoE’s last rate hike in August, the market reacted by selling GBP as the bank’s constant forecast inflation rate suggest that the bank is unlikely to raise rates again until after the Brexit deadline in March 2019. Indeed, the bank highlighted the potential negative consequences of a “no deal” Brexit, and uncertainty around whether a deal will be agreed is likely the main reason why the bank will be staying neutral for now.
In terms of how the bank will act following the deadline, it really depends on how Brexit is achieved. If the parliamentary process goes smoothly and a deal is approved by MP’s, the bank might look to raise rates early in May next year. However, if the process is more turbulent and MP’s put up a fight, leaving the agreement of a deal to the very last minute, the knock to confidence and growth in Q1 is likely to keep the BoE side-lined a little longer to make sure the economy recovers. If in the worst case scenario we see a “no deal” Brexit, then the bank might actually look to reverse its tightening policy in order to backstop the economy.
The Bank of Japan
The BoJ continues along with its program of tentatively and stealthily moving towards the end of QE. While the BoJ has been keen to highlight that it is not tightening monetary policy and that its latest decision, to raise the upper limit of the target on its Yield Curve Control program, is not a precursor to tightening, we are starting to see some smoke and JGB yields have been lifting.
Indeed, in the statement alongside the decision to lift the YCC target range, the BoJ reaffirmed that rates would stay at “current extremely low levels” for an “extended period of time” – the first time the bank has issued such guidance. The forward guidance can be seen as an attempt by the bank to disguise its intentions and prevent any excessive JPY strengthening.