Central Bank Watch – The Bank of Japan Shocks, Turkey and Indonesia as Expected

The highlight this week came from the Bank of Japan. The BoJ shocked markets adjusting the central bank’s yield curve control program which saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange. The Central Bank of Turkey left its key one-week repo rate unchanged at 9% in its December meeting on Thursday, as expected. Bank Indonesia increased interest rates by 25 bps during the last meeting of 2022, a fifth consecutive hike. 

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.

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

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.

Weekly Recap and Outlook

A quiet week heading into Christmas other than the BoJ action. The Bank of Japan as widely expected kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield. However, the market was shocked with Bank of Japan Gov. Haruhiko Kuroda adjusting the central bank’s yield curve control program which saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange.

Elsewhere in Asia, Bank Indonesia increased interest rates by 25 bps during the last meeting of 2022, a fifth consecutive hike, on Thursday as it sought to tame inflation and strengthen the rupiah exchange rate. The benchmark 7-day reverse repurchase rate now stands at 5.5%, the deposit facility at 4.75% and the lending facility at 6.25%, their highest level since 2009 and in line with market forecasts. So far in 2022, the central bank has lifted rates by 200bps.

The Central Bank of Turkey left its key one-week repo rate unchanged at 9% in its December meeting on Thursday, as expected, saying the current policy rate is adequate. The bank had cut key interest rates in November for the fourth consecutive month. There is concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy but the collapsed Lira and soaring inflation perhaps enabled reason to take hold. The TCMB had signaled it will end the rate-cutting cycle.

Highlights – Federal Reserve

  • Federal Reserve Credit declined $16.4bn last week at $8.531 TN.
  • Fed Credit was down $370bn from the June 22nd peak.
  • Over the past 171 weeks, Fed Credit expanded $4.820 TN, or 129%.
  • Fed Credit inflated $5.720 Trillion, or 203%, over the past 528 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.309 TN.
  • “Custody holdings” were down $116bn, or 3.4%, y-o-y.

Central Bank Highlights This Past Week:

Central Bank Week Ahead:

The most notable event are the Bank of Japan Governor Kuroda’s speech Sunday night and the central bank’s “Summary of Opinions” for insights on the central bank’s outlook after it unexpectedly increased its yield curve control threshold last Tuesday. The Argentina central bank has an Interest Rate Decision at the end of the week, the benchmark interest rate in Argentina was last recorded at 75 percent

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

  • 20:30 Argentina Interest Rate Decision Friday, Dec. 30

Monday, Dec. 26

  • Nothing Seen

Tuesday, Dec. 27

  • 10:30 Dallas Fed Manufacturing Index
  • 06:50 BoJ Summary of Opinions

Wednesday, Dec. 28

  • Nothing Seen

Thursday, Dec. 29

  • Nothing Seen

Friday, Dec. 30

  • 20:30 Argentina Interest Rate Decision, the benchmark interest rate in Argentina was last recorded at 75 percent

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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Sources: TC WSJ Bloomberg

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