Central Bank Watch – Focus on Inflation Over Banking Crisis, Bank of England Ahead

A busy week for central Banks which mainly went as expected. The Fed raised rates in the face of an unfolding banking crisis. The ECB, Norges Bank, HKMA and Bank Negara all followed suite. A busy week for the Fed; we had the second largest bank failure in U.S. history with First Republic, now three of the top four largest failures over just the past two months. Fed Chair Powell in his Q&A replied, “We on the Committee have a view that inflation is going to come down, not so quickly, but it’ll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates.

In our central bank watch in the week ahead all eyes on the Bank of England and ECB and Fed officials’ speeches. Poland also meets on rates. We also have two Latam central bank’s policy meeting, Peru and Chile this coming week.

Central Bank Weekly Analysis and Outlook – Banker dynamics are complex. There are myriad facets to analyze and contemplate.

Central bank monetary policy decisions and market activity interest rate decisions can have a dominant effect on financial markets, fiscal policy and geopolitics. We keep an eye on key banker developments, what they mean and what is ahead.

To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.

In the Week Ahead

This week all eyes on the Bank of England and ECB and Fed officials speeches. We also have two Latam central bank’s policy meeting, Peru and Chile this coming week.

Central Bank Highlights This Past Week:

Most of the G10 central banks may complete their rate hike cycles around the middle of the year or earlier, the unwinding of central bank balance sheets may continue longer, depending on the damage done.

This week’s central bank main events included:

  • The Federal Reserve raised rates by 25 bp to a target range of 5.00-5.25% in unanimous vote at their April meeting as expected. Market Fed futures pricing suggested 88% of a 25-bps hike before the decision while the vast majority of economists were also predicting a hike.
  • The central bank of Malaysia, Bank Negara Malaysia surprised markets by raising its key overnight policy rate by 25 basis points to 3% in the May meeting of 2023 on Wednesday.
  • ECB raised key rates by 25 bps in its May monetary policy decision following a 50-bps rate hike last meeting, and matching expectations from most analysts.
  • Norway’s central bank, the Norges Bank’s Monetary Policy and Financial Stability Committee unanimously raised the policy benchmark interest rate by 25 bps to 3.25 percent during its May meeting
  • Banco Central do Brasil​ kept its benchmark interest rate unchanged for the sixth consecutive meeting in February 2023, in line with market expectations.
  • The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, raised its benchmark interest rate for a tenth time this year, following the US Federal Reserve, by 25 basis points to 5.55% on Thursday.

Eyes on the Bond Market

Bond markets have moved with chaotic trepidation. The three-month/two-year Treasury yield spread inverted a further 25 bps this week to negative 132 bps (most inverted in four decades). Bond traders have the overhang that the U.S. Treasury market since 2008 has been conditioned to discount the possibility of aggressive rate cuts and QE-related Treasury/MBS purchases. Not a healthy scene, given the more manic markets get with bank lending excess the greater the probability of another bout of aggressive monetary stimulus.

Yield Watch


  • 2-yr: -3 bps to 4.06% (-10 bps for the week; UNCH in April)
  • 3-yr: -4 bps to 3.78% (-12 bps for the week; -5 bps in April)
  • 5-yr: -7 bps to 3.54% (-12 bps for the week; -7 bps in April)
  • 10-yr: -8 bps to 3.45% (-12 bps for the week; -4 bps in April)
  • 30-yr: -8 bps to 3.68% (-10 bps for the week; -1 bp in April)

Highlights – Federal Reserve

  • 2-yr: +18 bps to 3.91% (-15 bps for the week)
  • 3-yr: +21 bps to 3.65% (-13 bps for the week)
  • 5-yr: +14 bps to 3.42% (-12 bps for the week)
  • 10-yr: +10 bps to 3.45% (UNCH for the week)
  • 30-yr: +4 bps to 3.76% (+8 bps for the week)

Fed 2023 Bank Stress Tests.

Update: This got more interesting with the three bank failures in a week. Silicon Valley Bank (SVB) was the largest failure since Washington Mutual’s September 2008 collapse. It was also the second largest in U.S. history.

SVB is the dominant financier for Silicon Valley startups. SVB ended 2022 with a $120 billion securities portfolio, the vast majority mortgage securities (MBS and CMOs). SVB’s spectacular collapse will have a major negative impact on its $74 billion loan portfolio.

Silvergate Capital Corp. plans to wind down operations and liquidate its bank after the crypto industry’s meltdown. Silvergate collapsed amid scrutiny from regulators and a criminal investigation by the Justice Department’s fraud unit into dealings with fallen crypto giants FTX and Alameda Research. Silvergate’s woes deepened as the bank sold off assets at a loss and shut its flagship payments network, which it called “the heart” of its group of services for crypto clients.

The Federal Reserve last month released the hypothetical scenarios for its annual bank stress tests. This year, 23 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets. Last year the Fed found all 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks.

Central Bank Week Ahead:

This Week’s Interest Rate Announcements (Time E.T.)

In the week ahead we get 4 central banks delivering policy decisions.

Wednesday, May 10, 2023

  • 08:00 Poland Interest Rate Decision

Thursday, May 11, 2023

  • 07:00 BoE Interest Rate Decision, MPC Meeting Minutes
  • 19:00 Peru Interest Rate Decision

Friday, May 12, 2023

  • 16:00 Chile Interest Rate Decision

This Week’s Central Bank Speeches, Meetings (Time E.T.)

Monday, May 8, 2023

  • 03:10 German Buba Vice President Buch Speaks
  • 10:00 ECB’s Lane Speaks at Forum New Economy conference in Berlin

Tuesday, May 9, 2023

  • 04:00 ECB’s Lane participates in a panel at the IMF event ‘Europe’s Balancing Act: Taming inflation without a recession’
  • 08:30 Federal Reserve Board Governor Philip Jefferson participates in virtual conversation before the Atlanta Black Chambers Tuesdays Talks, 0830 EDT/1230 GMT. No text. Q&A from moderator. Livestream at https://us02web.zoom.us/j/82390494581.
  • 12:05 Federal Reserve Bank of New York President John Williams gives keynote before a hybrid Signature Luncheon event by the Economic Club of New York, 1205 EDT/1605 GMT. Text and moderated Q&A expected.
  • 13:00 ECB’s Schnabel Speaks

Wednesday, May 10, 2023

  • 07:35 German Buba Balz Speaks
  • 08:00 Poland Interest Rate Decision
  • 11:00 German Buba Wuermeling Speaks
  • 12:00 SNB Chairman Thomas Jordan speaks
  • 19:50 JPY BoJ Summary of Opinions

Thursday, May 11, 2023

  • 03:00 German Buba Mauderer Speaks
  • 07:00 BoE Interest Rate Decision, MPC Meeting Minutes
  • 08:00 ECB’s Schnabel Speaks
  • 09:15 BoE Gov Bailey Speaks
  • 10:15 Federal Reserve Board Governor Christopher Waller speaks on “Financial Stability and Climate Change” before the “Current Challenges in Economics & Finance” conference organized by the Federal Reserve Bank of St. Louis, Banco de Espana, and IE University, 1015 EDT/1415 GMT (1615 local time). Text available. Q&A from moderator. Webcast at https://ieuniversity.zoom.us/j/94500099237.
  • 12:00 German Buba Balz Speaks
  • 13:30 ECB’s De Guindos Speaks
  • 19:00 Peru Interest Rate Decision

Friday, May 12, 2023

  • 03:00 FOMC Member Bowman Speaks
  • 03:15 German Buba President Nagel Speaks
  • 04:00 ECB’s De Guindos Speaks
  • 07:15 BoE MPC Member Pill Speaks
  • 13:00 Federal Reserve Board Governor Lisa Cook gives commencement address before the 2023 Spring Convocation of Michigan State University, 1300 EDT/1700 GMT. Text available. No Q&A. Livestream at https://commencement.msu.edu/.
  • 16:00 Chile Interest Rate Decision
  • 19:45 Federal Reserve Bank of St. Louis President James Bullard and Federal Reserve Board Governor Philip Jefferson participate in “Toward a Monetary Policy Strategy” panel before the Hoover Monetary Policy Conference: “How to Get Back on Track” hosted by the Stanford University Hoover Institution, 1645 PDT/1945 EDT/2345 GMT. In-person event with virtual option. (Bullard: slides available, press release TBD, no media availability; Jefferson: text available, audience Q&A expected).

Federal Reserve FOMC Schedule 2023

The Fed with a Strong US Dollar

The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.

The survey of 40 economists was conducted Oct. 21-26.

  • 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
  • 38% said the policy makers would be forced to cut rates earlier than expected and
  • 18% said the Fed would not be able to raise rates as much as planned.
  • Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.

The Fed as expected raised another 50 basis-points last meeting. The median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.

“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”

Anna Wong (Bloomberg chief US economist)

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