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


  • 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

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.

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