Big Week for Central Banks: ECB, BOJ, FOMC, BOE

Mid Week Bond Update

Big Week for Central Banks: ECB, BOJ, FOMC, BOE

The meeting calendars of four key central banks have converged, generating a welter of decisions and data...


Last Thursday, the European Central Bank (ECB), continued its unusually specific “forward guidance” by restating its resolve to keep its strongly accommodative policy in place well into next year. In principle, the move to highlight policy stability should provide a reassuring backdrop to the increasingly chaotic Brexit negotiations between the EU and UK.

On Monday July 30, the Bank of Japan (BOJ) also signaled renewed commitment to economic stimulus by reaffirming its “YCC” (yield curve control) policy– committing to keep the yield of its 10-year JGB bonds near zero, by whatever means possible. The only change: the BOJ widened the band of permissible yield by a mere ten basis points, from 0.10% to 0.20%. The value of the BOJ’s holdings of bonds and stocks is now nearly the size of its overall economy – a far cry from the Fed’s roughly 22% of GDP.

 

Source: Bloomberg, July 31, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

Next up will be the Fed’s policy announcement on Wednesday, August 1. Few expect any change in rates or policy; it’s been the Fed’s practice in recent years to use its quarterly press conferences as the place to make such changes, with the next one scheduled for Wednesday, September 26th.

That will be quickly followed by the Bank of England’s Monetary Policy Committee meeting, which will unveil its decisions on Thursday, August 2.  It’s widely expected that the Bank’s base rate will be raised by 25 basis points to 0.75%, even in the face of growing uncertainty about the details of the UK’s separation from the European Union this coming March.  In light of the uncertainty, special attention will be paid to Governor Mark Carney’s post-meeting comments.
 

On the rise: Eurozone Inflation

For the second month in a row, Eurozone consumer inflation has crossed the 2% target line to the upside – the first time that level has been seen since late 2012, as inflation fell while Europe slid into recession.

 

Source: Bloomberg, July 31, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The ECB’s decision to stay the course for the next year with respect to monetary accommodation would seem brave to some, aggressive to others -- but may reflect concern about Brexit and the strong memory of the 2011-2012 recession of, which many blamed on the ECB’s raising rates too early in a recovering market.

 

On the Slide: Japan’s Inflation Rate

The continuation of the BOJ’s yield curve control policy led some observers to miss the downbeat assessment of future inflation by the Bank of Japan, which described deflationary attitudes as “deeply entrenched”. The BOJ revised down its consumer price inflation forecasts for 2018-2020 from 1.3% to 1.1% in 2018, from 2.3% to 2.0% in 2019, and from 2.3% to 2.1% in 2020. 

 

Source: Bloomberg, July 31, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

That’s consistent with its first-ever forward guidance, saying that short- and long-term rates would be kept low.

The new lower rate of 2% is believed by some to be unachievably high, given the rapidly aging population, shortages of labor, and consumer expectations of deflation.

 


All data Source: Bloomberg, on their respective dates unless otherwise specified.
 

Definitions:

Forward guidance refers to the issuance of economic forecasts and policy plans by central banks to influence market expectations of future levels of interest rates.

Yield curve control, also known as YCC, refers to the Bank of Japan's policy of keeping the yield of the 10-year Japan Government Bond (JGB) at or near zero percent.

 

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