Central Bank Watch – RBA, RBNZ, BCCh, RBI Monetary Policy Meetings

A quieter week banker wise, FDIC Chairman Michael Barr told the Senate Banking Committee that he anticipates having to increase capital and liquidity standards for firms over $100 billion, adding that more regulation is needed. Bank of Thailand, Columbia BanRep and Mexico Banxico all hiked by 25bps as widely expected. South African Reserve Bank increased its benchmark repo interest rate by a bigger than expected 50 bps. Heading into Easter four central banks, RBA, RBNZ, RBA and BCCh will deliver policy decisions over the coming week with implications more for regional markets than global market conditions.

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

We have key monetary policy meetings from Thailand, South Africa, Columbia and Mexico.

Federal Reserve Vice Chair for Supervision Michael Barr testifies on “Bank Oversight” before the Senate Committee on Banking, Housing and Urban Affairs and on “Bank Supervision” before the House Financial Services Committee

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:

  • Bank of Thailand announced a 25-bps rate hike to 1.75%, as expected.
  • Columbia BanRep 25bps hike to 13% in a unanimous vote, signaling a strong data-dependent approach.
  • Mexico Banxico hiked 25bps as widely expected, in a unanimous decision
  • South African Reserve Bank increased its benchmark repo interest rate by another 50 bps to 7.75% at its March 2023 meeting. Markets had expected a smaller 25 bps increase.
South Africa Raises Interest Rates 50bps, Revises Inflation Higher
  • South Korean banks will receive an extension of eased loan-to-deposit rules.
  • Riksbank Governor Thedeen said that inflationary pressures may have been underestimated and that a rate hike in April is likely.
  • Outgoing Bank of Japan Governor Kuroda said that sustainable inflation has not been reached yet and that the central bank must be ready to issue digital currency that can coexist with other forms of money.
  • European Central Bank policymaker Rehn said that a decision on a digital euro is expected in the fall.
  • European Central Bank policymaker Schnabel said that rising unit labor costs suggest the presence of second round inflationary effects, adding that she has not seen a general outflow of deposits from eurozone banks.
  • The latest economic bulletin from the ECB noted that inflation is projected to remain “too high for too long.”
  • Bank of England policymaker Mann said that the central bank is facing a tough task during the second half of 2023 since core inflation has not slowed as much as headline inflation.
  • March 30 – Bloomberg (Catarina Saraiva): “One of the Federal Reserve’s most prolific policy messengers is laying low at a crucial moment for the central bank, after finding herself at the center of controversy over turmoil in the banking sector. San Francisco Fed President Mary Daly, who has been an increasingly influential voice on Fed policy in recent years, is now a target of criticism over how effective Fed supervisors were in monitoring and responding to problems at Silicon Valley Bank before it collapsed. Just a few weeks ago, Daly’s name was among a handful floated as potential candidates to replace former Vice Chair Lael Brainard on the Fed board in Washington.”
  • March 29 – Bloomberg (Hannah Levitt, Craig Torres and Saleha Mohsin): “For the Federal Reserve system, oversight failures ahead of the collapse of Silicon Valley Bank ran coast to coast. At the San Francisco Fed — largely responsible for monitoring SVB — there was heightened turnover among supervisory officials in recent years… The culture under President Mary Daly at times put more emphasis on improving relationships among staff than installing people with strong oversight backgrounds, leading to departures, the people said. Staff for the Fed board in Washington had informed some officials of their concern around Daly’s management of her branch’s supervisory and regulatory work…”
  • March 28 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said financial stress has increased in recent weeks due to the banking crisis but can be contained with regulatory policies rather than interest rates. ‘In my view, continued appropriate macroprudential policy can contain financial stress in the current environment, while appropriate monetary policy can continue to put downward pressure on inflation… The macroprudential policy response to these events has been swift and appropriate. Regulatory authorities have used some of the tools that were developed or first utilized in response to the 2007-09 financial crisis in order to limit the damage to the macroeconomy, and they’re ready to take additional action if necessary.’”

Eyes on the Bond Market

U.S. Treasuries closed out March modestly higher, adding to their first quarter gains. The yield on the 2-year Treasury fell to 4.06%, down 3.7 basis points on Friday and posting the biggest monthly drop since January 2008. Money Market assets surged a stunning $304 billion in three weeks to a record $5.198 TN. Treasuries advanced to fresh highs and continued building on their gains after the much-watched Personal Income/Outlays report for February showed some disinflation.

The PCE Price Index slowing to 5.0% yr/yr from 5.3% in January while the core-PCE Price Index dipped to 4.6% from 4.7%. The University of Michigan one-year inflation expectations fell to 3.6% from 3.8% in the preliminary March reading and 4.1% in the final February reading.

Yield Watch

Friday/Week/Month/Q1

  • 2-yr: -5 bps to 4.06% (+29 bps for the week; -74 bps in March; -36 bps for Q1)
  • 3-yr: -6 bps to 3.83% (+24 bps for the week; -68 bps in March; -41 bps for Q1)
  • 5-yr: -5 bps to 3.61% (+20 bps for the week; -56 bps in March; -39 bps for Q1)
  • 10-yr: -6 bps to 3.49% (+11 bps for the week; -43 bps in March; -39 bps for Q1)
  • 30-yr: -6 bps to 3.69% (+5 bps for the week; -24 bps in March; -29 bps for Q1)
Bond Traders Weekly Outlook: 2-year Treasury Yield fell 73.5bps in March, Biggest Monthly Drop Since January 2008

Highlights – Federal Reserve

  • Federal Reserve Credit jumped $38.1bn last week to a five-month high $8.696 TN – with a three-week gain of $391bn.
  • Fed Credit was down $205bn from the June 22nd peak.
  • Over the past 185 weeks, Fed Credit expanded $4.969 TN, or 133%.
  • Fed Credit inflated $5.885 Trillion, or 209%, over the past 542 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt fell $15.5bn last week to $3.293 TN – the low back to June 2017.
  • “Custody holdings” were down $170bn, or 4.9%, y-o-y.

Markets began the year pricing 38 bps of rate cuts between the May 3rd and December 13th FOMC meetings. By March 8th, this had shifted to 20 bps of additional tightening. A week later (March 15), markets were pricing 106 bps of rate cuts. By quarter end, expectations were for rates to drop 39 bps.

What is The Federal Reserve Discount Window and How it Operates

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.

Federal Reserve Hypotheticals For 2023 Bank Stress Tests have Unemployment at 10%

Central Bank Week Ahead:

In the week ahead we have key monetary policy meetings from

  • RBA (Tuesday): Australia’s central bank faces a somewhat split consensus with the balance of opinion landing marginally in favor of no change to the 3.6% cash rate target. That said, 16 expect such an outcome while a significant number (11) expect a 25bps hike. Markets are priced for no change.
  • RBNZ (Tuesday): Consensus almost unanimously expects another 25bps hike to 5%. That would be a downshift from the prior 50bps hike in February when they discussed hiking by either 50 or 75. Forward guidance projected the policy rate to rise to a peak of 5% which could make this the last hike of the cycle pending further developments.
  • Chile (Tuesday): BCCh is expected to leave its overnight rate target unchanged at 11.25%.
  • RBI (Thursday): Most economists expect India’s central bank to deliver another 25bps hike. Markets are less convinced.

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

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

Tuesday, April 4, 2023

  • 00:30 RBA Interest Rate Decision and Statement
  • 16:00 Chile Interest Rate Decision
  • 22:00 RBNZ Interest Rate Decision & Statement

Thursday, April 6, 2023

  • 00:30 RBI Interest Rate Decision

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

Monday, April 3, 2023

  • 10:30 BoC Business Outlook Survey
  • 16:15 Federal Reserve Board Governor Lisa Cook participates in moderated conversation on the U.S. economic outlook and monetary policy hosted by the University of Michigan Economics Department. No text. Q&A from moderator. Webcast at https://ross.mediasite.com/mediasite/Play/687892c01ea54f39806a526648638a321d.

Tuesday, April 4, 2023

  • 00:30 RBA Interest Rate Decision and Statement
  • 05:15 MPC Member Tenreyro Speaks
  • 12:30 BoE MPC Member Pill Speaks
  • 13:30 Federal Reserve Board Governor Lisa Cook gives introductory remarks before the “Exploring Careers in Economics – Spring 2023” event hosted by the Federal Reserve, Text available. No Q&A. Virtual, livestreamed at www.federalreserve.gov. https://www.federalreserve.gov/conferences/exploring-careers-in-economics-spring-2023.htm
  • 13:45 Federal Reserve Bank of Boston President Susan Collins participates in moderated discussion on career opportunities and diversity in economics before the “Exploring Careers in Economics – Spring 2023” event hosted by the Federal Reserve, Virtual, livestreamed at www.federalreserve.gov. https://www.federalreserve.gov/conferences/exploring-careers-in-economics-spring-2023.htm
  • 16:00 Chile Interest Rate Decision
  • 18:45 Federal Reserve Bank of Cleveland President Loretta Mester speaks before the Money Marketeers of New York University Inc.. Livestream and text available. Audience Q&A expected.
  • 21:30 RBA Chart Pack Release
  • 22:00 RBNZ Interest Rate Decision & Statement
  • 22:30 RBA Governor Lowe Speaks

Wednesday, April 5, 2023

  • 05:15 MPC Member Tenreyro Speaks
  • 21:30 RBA Financial Stability Review

Thursday, April 6, 2023

  • 00:30 RBI Interest Rate Decision
  • 10:00 Federal Reserve Bank of St. Louis President James Bullard gives presentation on the U.S. economy and monetary policy before the Arkansas State Bank Department’s Day with the Commissioner event. In-person event with virtual option. Audience Q&A expected. Slides and press release anticipated.

Friday, April 7, 2023

  • All Day Holiday – Good Friday

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)
Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test

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Sources: TC WSJ Bloomberg Scotia Bank

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