Central Bank Watch – Week Ahead Focus on ECB, PBOC and Inflation

In the past week we had Bank of Canada, Reserve Bank of Australia and Bank Negara as expected stayed pat. Banco Central de Chile and Poland as expected cut rates, however Poland’s central bank surprised cutting by 75bps rather than 25bps. In the week ahead we have the ECB where markets are pricing less than 50% odds that a 25bps hike may be delivered. We also get the PBOC who are not expected to change its key policy rate. Finally, we have Peru’s central bank which may follow other LatAm central banks like Brazil’s and Chile’s and cut its reference rate by 25bps. We also have the US CPI which could inform the Federal Reserve’s next moves, and speakers from the BoE, BoJ, RBA, ECB.

The People’s Bank of China has already said they will lower the foreign exchange reserve requirement ratio to 4.00% from 6.00%, effective September 15. The PBOC also confirmed speculation about rate cuts on some existing mortgages, effective September 25.

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.

In the Week Ahead

In the week ahead we have three central bank’s monetary policy meetings.

• The European Central Bank on Thursday with risks surrounding what they may do appear to be finely balanced. Markets are pricing less than 50% odds that a 25bps hike may be delivered. Slightly less than half of the consensus at the time of writing expect a 25bps hike. ECB policymakers’ guidance has been mixed. The ECB’s account of the July Monetary Policy Meeting that was released on August 31st provided no clear guidance on what decision may lie ahead:
• China’s central bank, the PBOC is not expected to change its key policy rate on Thursday evening (ET). That doesn’t mean it’s impossible given its openness to surprising markets and the multitude of challenges facing the Chinese economy. It would, however, be rare for a back-to-back cut to be delivered after the 15bps reduction that surprised consensus on August 14th.
• Banco Central de Reserva del Peru may follow other LatAm central banks like Brazil’s and Chile’s and cut its reference rate by 25bps on Thursday. The country’s economy has weakened with GDP down by a mild -0.5% y/y in Q2. Inflation is ebbing with core CPI at 3.8% y/y, down from a peak of almost 6% although headline inflation remains elevated.

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.

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:

• he Federal Reserve released its Biege Book Wednesday prepared at the Federal Reserve Bank of Kansas City based on information collected on or before August 28, 2023.

• Bank of Canada held its overnight rate to 5.00% in September 2023 as expected by markets, following up the 25bps rate hikes from the two previous meeting which extended its tightening cycle after the brief pause in March and April.

• The Reserve Bank of Australia left rates unchanged at the September meeting in line with the OIS market pricing the probability of no rate hike unanimously. The cash rate at 4.10% is the highest level since May 2012.

• Chile: BCCh cuts benchmark rate by 75 bps to 9.50% unanimous 75bps cut by the BCCh that also raised the bar for the BCCh to repeat with a 100bps cut this year
• Poland’s central bank cut its main interest rate by 75 basis points to 6.00%, in a shock decision ahead of October elections that sent the zloty currency tumbling against the euro. A narrow majority of analysts polled by Reuters had expected a 25-bps cut, but markets and economists alike were blindsided by the scale of the easing delivered. The zloty plunged 1.5% to its weakest level since May and banking stocks dropped over 5%.
• Bank of Japan policymaker Takata said that there are early signs of the 2.0% inflation target being reached, but easy policy stance should be maintained at this time.
• European Central Bank policymaker Knot said that markets may be underestimating the likelihood of a rate hike at the September meeting, adding that the decision could be a “close call.”
• ECB policymaker Villeroy de Galhau said that while the economy is slowing down, there is still no recession on the horizon and lowering inflation should remain the priority.
• Fed’s Susan Collins Fed should ‘allow time’ when making monetary policy choices, Too soon to say inflation sustainably moving back to target, Fed must balance lowering inflation against slowing economy too much, Fed can likely achieve goals without causing notable economic pain
• Bank of England Governor Bailey said that many indicators are pointing toward a marked slowdown in inflation.
• The BoE Decision Maker Panel survey showed a decrease in three-month inflation expectations to 4.9% from 5.2% while the year-ahead outlook was lowered to 4.9% from 5.4%. French Finance Minister Le Maire said that inflation is decelerating, but at a slow pace.

Eyes on the Bond Market

U.S. Treasuries finished the holiday-shortened week despite mounting global stress, Treasuries yields were pulled modestly higher. Ten-year Treasury yields gained nine bps this week to 4.26%, with benchmark MBS yields rising 11 bps to 6.00%. Global bond market liquidity appears increasingly under the grips of deleveraging. This week’s action left the 2s10s spread unchanged at -71 bps. Crude oil gained $1.92, or 2.2%, for the week while the U.S. Dollar Index gained 0.8% this week. What stands out to us is bonds are just not seeing much benefit from changes in Fed rate policy expectations.

Yield Watch

Friday/Week

• 2-yr: +1 bp to 4.97% (+9 bps for the week)
• 3-yr: +2 bps to 4.69% (+12 bps for the week)
• 5-yr: +2 bps to 4.40% (+11 bps for the week)
• 10-yr: UNCH at 4.26% (+9 bps for the week)
• 30-yr: -2 bps to 4.33% (+4 bps for the week)

Highlights – Federal Reserve

• Federal Reserve Credit declined $22.1bn last week to $8.065 TN.
• Fed Credit was down $836bn from the June 22nd, 2022, peak.
• Over the past 208 weeks, Fed Credit expanded $4.339 TN, or 116%.
• Fed Credit inflated $5.254 TN, or 187%, over the past 565 weeks.
• Fed holdings for foreign owners of Treasury, Agency Debt declined $5.2bn last week to a six-week low $3.461 TN.
• “Custody holdings” were up $43bn, or 1.3%, y-o-y.

Fed 2023 Bank Stress Tests.

Busy Central Bank Week Ahead:

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

Monday, September 4, 2023

• None Seen

Tuesday, September 5, 2023

• None Seen

Wednesday, September 6, 2023

• None Seen

Thursday, September 7, 2023

• 08:15 EUR ECB Interest Rate Decision
• 19:00 Peru Interest Rate Decision
• 22:00 PBOC Interest Rate Decision

Friday, September 8, 2023

• None Seen

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

Monday, September 11, 2023

• 04:00 BoE MPC Member Pill Speaks
• 19:00 BoE MPC Member Mann

Tuesday, September 12, 2023

• None Seen

Wednesday, September 13, 2023

• 09:15 BoE Deputy Governor Woods Speaks

Thursday, September 14, 2023

• 07:15 EUR ECB Supervisory Board Member Fernandez-Bollo Speaks
• 08:15 ECB McCaul Speaks
• 08:15 EUR ECB Interest Rate Decision
• 08:45 EUR ECB Press Conference
• 10:15 EUR ECB President Lagarde Speaks
• 12:00 EUR ECB’s Enria Speaks
• 16:30 Fed’s Balance Sheet
• 16:30 Reserve Balances with Federal Reserve Banks
• 19:00 Peru Interest Rate Decision
• 22:00 PBOC Interest Rate Decision

Friday, September 15, 2023

• 03:10 ECB Supervisory Board Member Fernandez-Bollo Speaks
• 05:45 ECB President Lagarde Speaks

Federal Reserve FOMC Schedule 2023

• January 31-February 1, 2023 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)
• March 21-22 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
• May 2-3 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
• June 13-14 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
• July 25-26 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
• September 19-20 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
• October 31-November 1 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
• December 12-13 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)

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.

Latest Key Central Bank Decisions, Reports Archive

2023

• Federal Reserve Beige Book Highlights Consumers Exhausted Savings, Job Growth Subdued
• Bank of Canada Holds Rates at 5.00% as expected, Warns CPI Higher with Gasoline Prices
• RBA Holds Rates at Ten Year High 4.10%, For Third Straight Meeting
• Fed’s Powell at Jackson Hole; Inflation: Progress and the Path Ahead, the Market Response
• Norway’s Norges Bank Raised Rates 25bps to 4% and Guided Another Hike Likely in September
• Philippines Central Bank Held Rates at 6.25% with Stable Peso and Downward Inflation Trend
• Russia’s Currency Slide Accelerates, Is the Ruble the New Turkish Lira?
• Bank of England Raises Interest Rates to 15-year High 5.25%, Monetary Policy Restrictive
• RBA Holds Rates at Ten Year High 4.10%, For Second Straight Meeting
• Bank of Japan No Change to Monetary Policy, JGB Yield Band Hard Celling to 1.00%
• ECB Raises Rates Another 25bps, Hints May be End of Rate Hikes
• Hong Kong’s Monetary Authority Raises Interest Rates in Lockstep with Fed to 16 Year High
• Federal Reserve Raise Rates to 22-Year High 5.25-5.50% Range as Expected
• Bank of Korea Keeps Rates Unchanged at 3.50%, Too Early on Stable Won Level
• Bank of Canada Raises Rates by 25bps to 5.00%, Persistent Price Pressures Remain
• Reserve Bank of New Zealand Leaves Rates Unchanged 5.50%, Inflation Remains Too High
• RBA Holds Rates at Ten Year High 4.10%, Signals Hiking Cycle Near End
• Sweden’s Riksbank Raise Rates by 25 bps, Krona Falls to New Record Low Against Euro
• Banco de México Leaves Rates Unchanged at Record High 11.25%, Inflation Risks to Upside
• Central Bank of Turkey Raises Rates First Time in Two Years, By 650 bps to 15.0%, Lira Collapses
• Bank of England Raises Interest Rates to 15-year High 5.00%, Risk of British Recession Increases
• Norway’s Norges Bank Raised Rates by 50 bps to 3.75%, Supports Krone, Fights Inflation
• Philippines Central Bank Held Rates at 6.25%, Highest Since May 2007 as Inflation Moderates
• Bank Indonesia Keeps Rates Unchanged at Highest Level Since 2009 With Weaker Rupiah
• Swiss National Bank Raised Policy Rate by 25 bps to 1.75%, Will Remain Active in FX Market
• Brazil Central Bank Left Rates Steady at 13.75%, Delete Reference to Possibly Resuming Hiking
• Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band as Expected
• ECB Tightens Screws, Raises Rates Another 25bps Despite Europe Being in a Recession
• Hong Kong’s Monetary Authority Kept Interest Rates in Lockstep With Fed, Hibor Continues to Rise
• Federal Reserve Leave Rates Unchanged as Expected. See 5.6% Fed Fund Rate at Year End
• Reserve Bank of India Kept its Key Repo Rate at 6.50% as Expected
• Bank of Canada Raises Rates After Five Month Pause by 25bps to 4.75%
• RBA Suprises Again Raising Rates to Ten Year High 4.10%, Australian Dollar Higher
• South Africa Raises Interest Rates 50bps, Rand Falls to All Time Low
• Ahead of Election Runoff Turkey Central Bank Leaves Rates at 8.5% as Lira Hits New Lows
• Reserve Bank of New Zealand Raise Rates by 25bp to 5.50%, Kiwi Sells Off on Peak Rate
• Bank of England Raises Interest Rates 25bps to 4.50%, Inflation Remains Too High
• Federal Reserve Financial Stability Report, Follows Three of the Four Largest Failures in U.S. History
• ECB Raises Rates Another 25bps, Highest Level Since July 2008
• Norway Hikes Interest Rate to 3.25 percent, Concerns About Weak Krone
• Hong Kong’s Monetary Authority Raised Interest Rates 25bps Despite Banking Liquidity at 2008 Lows
• Brazil Central Bank Left Rates Steady for Sixth Month at 13.75%, Less Likely to Resume Hikes
• Federal Reserve Raises Rates 25bps as Expected, Removes Additional Firming May be Appropriate
• Bank Negara Malaysia Surprises by Raising Interest Rates 25 bps to 3%
• Deja Vu as Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band
• Sweden’s Riksbank Raise Rates by 50 bps, However Dovish Tilt Weakens Krona
• An RBA Fit for The Future, 51 Revolutionary Recommendations for Australia’s Central Bank
• Bank Indonesia Keeps Rates Unchanged at Highest Level Since 2009 With Rupiah Stable
• Bank of Canada Holds Rates at 4.50% as Expected, Sees Inflation at 2% End of 2024
• Bank of Korea Keeps Rates Unchanged at 3.50%, Higher Rate Remains Possible
• Reserve Bank of India Surprised Keeping its Key Repo Rate at 6.50%
• Reserve Bank of New Zealand Unexpectantly Raise Rates by 50bp to 5.25% to Highest Since December 2008
• RBA Keeps Rates Steady at Ten Year High 3.6%, Monetary Policy Operates with a Lag
• ECB Raises Rates Another 50bps, Banking Sector Resilient
• Federal Reserve Beige Book Highlights Supply Chain Disruptions Continued to Ease
• Bank of Canada Holds Rates at 4.50% as Expected, USDCAD at Four Month High
• RBA Raises Rates to Ten Year High 3.6%, Less Hawkish Statement
• Reserve Bank of New Zealand Raise Rates by 50bp to 4.75% to Highest Since January 2009
• Banco de México Raises Rates by 50 bps to Record High 11.00%, Reacts to Higher Inflation
• Federal Reserve Hypotheticals For 2023 Bank Stress Tests have Unemployment at 10%
• Sweden’s Riksbank Raise Rates by 50 bps, Moves to Strengthen Krona
• Reserve Bank of India Hike Rates Sixth Time in a Row to 6.50%
• RBA Raises Rates to Ten Year High 3.35%, says Further Hikes Ahead
• ECB Raises Rates Another 50bps, Lagarde Says Another 50bps in March
• Bank of England Raises Interest Rates 50bps to 4.0%, Projects Inflation Likely Peaked
• Hong Kong’s Monetary Authority Raised Interest Rates 25bps Lockstep with US Federal Reserve
• Brazil Central Bank Left Rates Steady for Fourth Month at 13.75%, Cautious Due to Fiscal Risk
• Federal Reserve Raises Rates 25bps as Expected, Disinflationary Process has Started
• Bank of Canada Hikes Rates 25 bps to Highest Level Since 2008, Signals Holding Pattern
• Norway Holds Interest Rate at 2.75 percent, Signaled More Hikes Ahead
• Turkey Central Bank Left Interest Rates Unchanged at 9% As Lira Hits New Lows
• Bank Negara Malaysia Leaves Interest Rates Unchanged to Assess Previous Hikes Impact
• Bank Indonesia Raised Rates Another 25 basis points to Highest Level Since 2009
• Federal Reserve Beige Book Highlights Housing Markets Continued to Weaken
• Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band
• Bank of Korea Raises Rates To 3.50%, Highest level Since August 2008

2022

• Turkey Central Bank Cuts Left Interest Rates Unchanged at 9%, Bond Yield Hits Six Year Low
• Bank Indonesia Raised Rates by 25 basis points to Highest Level Since 2009
• Yen Soars After Bank of Japan Mini Pivot Widens Yield Curve Control Band
• Banco de México Raises Rates by 50 bps to Record High 10.50%, Hints at More Hikes
• ECB Raises Rates Another 50 bps as Expected, Forecasts Higher Inflation
• Bank of England Raises Interest Rates 50bps to 3.5%, Projects Inflation Likely Peaked
• Taiwan Raised Interest Rate by 1.75 percent, Highest Since 2015
• Norway Raised Interest Rate by 25 bps to 2.75 percent, Highest Since 2009
• Swiss National Bank Raises Policy Rate by 50 bps to 1.00%, as expected
• Philippines Central Bank Raised Rates by 50 basis points to 5.50% with Inflation at 14 Year Highs
• Hong Kong’s Monetary Authority Raised Interest Rates in Lockstep with US Federal Reserve
• Federal Reserve Raises Rates 50bps as Expected, Hawkish Revisions to Unemployment and Inflation
• Bank of Canada Hikes Rates 50 bps to Highest Level Since 2008
• Reserve Bank of India Hike Rates Fifth Time in a Row to 6.25%
• RBA Raises Rates to Ten Year High 3.10%, says Inflation in Australia Too High
• Federal Reserve Beige Book Highlights Higher Interest Rates Further Dented Home Sales
• NY Fed Williams Expects US Jobless Rate to Rise from 3.7% to 4.5-5.0%
• Turkey Central Bank Cuts Interest Rates Another 150bp Ending Easing Cycle
• Sweden’s Riksbank Raise Rates by 75 bps to the Highest Level Since December 2008
• South Africa Raises Interest Rates 75bps to Tame Inflation
• Bank of Korea Raises Rates To 3.25%, Highest level Since June 2012
• Reserve Bank of New Zealand Raise Rates by 75bp to 4.25% to Highest Since January 2009
• Appreciation of Swiss Franc Guards Against Inflation says SNBs Jordan
• Fed Vice Chair Brainard says Slower Pace of Rate Increases Probably Soon
• Bank of England Raises Interest Rates 75bps to 3% in Biggest Rise in 30 Years
• Norway Raised Interest Rate by 25bps, Norwegian Crown Fell Against Euro
• Markets Reverse Sharply on Feds Powell Statements, What Does it all Mean?
• Federal Reserve Again Raises Rates 75bps as Expected, Hints at Possibly Smaller Hikes
• Japan Spent ¥6.35 trillion in October on Intervention to Support the Yen
• ECB Raises Rates Another 75 bps as Expected TLTRO Terms and Conditions Recalibrated
• Bank Indonesia Raised Rates by Another 50 basis points to 4.75% to Tame Inflation
• Federal Reserve Beige Book Highlights Employment Strength as Price Increases Generally Moderate
• RBA says Financial Stability Risks Have Increased Globally
• Banco de México Raised Rates for 11th Straight Time to Record 9.25%
• Cable Pounded Again After Indecisive Bank of England Statement
• Japan Intervened to Support Yen for First Time Since 1998 After BOJ Decision
• Swiss National Bank Raises Policy Rate by 75 bps to 0.50%, Swiss Franc Falls sharply
• Philippines Central Bank Raised Rates by 50 basis points to 4.25%, Moves to Support Peso
• Bank of Japan Monetary Policy Unchanged Sending Yen to a Fresh 24-Year Low
• Brazil Central Bank Pauses Rates at 13.75%, after Inflation Eased Below 10%
• 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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