Central Banks Galore

It’s a big week for central banks.  Several central banks globally meet to decide upon monetary policy this week.  The biggest focus will be on the Fed FOMC but this week also sees Norges Bank, Bank of England, Bank of Japan and central banks in Indonesia, Philippines, Taiwan, and Brazil meet.

Markets are already aggressive in pricing in Fed rate cuts.  As US-China trade tensions have worsened markets have intensified their expectations of Fed easing, with around 75bps of easing already priced in.  Given how much is priced in in terms of Fed easing, if the Fed does not validate this with a dovish statement and/or shift in the dot plot there could be a significant risks of disappointment, which could weigh on equities, but leave the USD on a firmer footing.

Admittedly the Bank of Japan is more constrained than the Fed in terms of policy room, but their rhetoric has become more dovish.  I don’t expect easing anytime soon but the BoJ is likely to sound dovish and could offer some enhanced forward guidance.  BoJ governor Kuroda outlined four options in terms of more policy stimulus, with one being a further cut in the deposit rate.  However, BoJ would need to outline how they plan to alleviate the pressure on bank profits from such a move.

Bank of England is unlikely to move.  Data in the UK has been mixed, with softening in Q2 growth but ongoing pressure on inflation given the tightness of the labour market.  It’s also difficult for the BoE given the large amount of Brexit uncertainty. GBP risks remain to the downside over the short term especially given the heightening political noise in the UK.  The Norges Bank is likely to stand out amongst the crowd, with a rate hike expected, its second in just three months.

Elsewhere in Asia I expect no change from Bank Indonesia, BSP in the Philippines, and CBC in Taiwan. Bank Indonesia is edging towards a rate cut amid low inflation and slowing activity, but will likely want to see further signs of IDR stability before pulling the trigger to begin reversing the 175bp of hikes implemented in 2018.

Weaker activity in Taiwan calls for some sort of stimulus but the reality is that a rate cut will do little to alleviate the pain given that much of the problem is due to external factors.  Instead much of the adjustment may take place on the currency front.

I expect the BSP in the Philippines to maintain its overnight borrowing rate at 4.50% at this week’s meeting while signalling more RRR cuts ahead. Although CPI came in above expectations in May, at 3.2% y/y, it remains close to the midpoint of the BSP’s 2-4% band and I don’t expect it to stand in the way of further easing, but think BSP may wait until at least August to move again.

 

 

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Central Banks Galore

Although markets are quietening down and liquidity is thinning ahead of the holidays there are still a few important and potentially market moving events this week.   These include several central bank meetings, with the Fed FOMC at the top of the pile on Wednesday.  The Fed is widely expected to hike by 25bp to between 2.25% and 2.50% and remove any remaining forward guidance.

A few weeks ago there was little doubt that the Fed would hike rates this month, but since then it has looked like less of a done deal.  Dovish comments from Fed officials suggest that there will be a lot of attention on Fed Chairman Powell’s press conference, especially following his recent comments that interest rates are “just below neutral”.   Although the Fed is likely to hike, it is likely to be seen as a dovish hike, which ought to leave the USD without much support.

In Asia there are three central bank meetings in focus.  On Wednesday the Bank of Thailand (BoT) is likely to hike its benchmark by 25bps to 1.75%, largely due to financial imbalances (household debt and bad loans) rather than inflation concerns.  On Thursday Taiwan’s central bank meeting (CBC) is likely to keep its benchmark interest rate unchanged at 1.375%, with low and declining inflation, suggesting the long held status quo will be maintained.

Also on Thursday I expect no change in policy by Bank Indonesia. Inflation is clearly non-threatening from BI’s perspective and unless the IDR weakens anew, BI will increasingly be in a position to keep its powder dry. Elsewhere in Asia, the Bank of Japan will be in focus.  No change in policy is widely expected on Thursday, with the central bank still well away from any tightening in policy given still low inflation.

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