Category: Monetary Policy

Three Central Banks Meet This Week, with Very Different Agendas

Whatever force had gripped the global capital markets since the start of the year has been broken.  This simple characterization is rich.  It is not clear if, or what, macroeconomic considerations were driving the markets.

The markets had taken the unsurprising Fed rate hike in mid-December in stride. The dramatic moves in the market did not begin until this year.  Some have suggested China was at the crux of it, but the global impact seemed out of proportion. 

Meeting the Mandate Still a Priority for Draghi

ECB President Draghi has sent the euro back down into the lower end of the recent range as he gave a strong signal that additional action could come as early as March, the next meeting.  The euro had approached the upper end of its range yesterday and now is slipping through $1.08.

Draghi embraced and defended the ECB’s action but clearly and unequivocally opened the door wide for more action. By indicating, that rates will remain at current low level of lower is a signal that the -30 bp deposit rate has not exhausted room for more cuts.   

Brazil May Want to Rethink Using IMF Forecasts

Brazilian central bank President Tombini said it would take into account the IMF’s revised forecasts for a deeper recession when it meets this week to decide on policy. Sorry, but we don’t buy it. IMF forecasts should not affect a central bank. Yes, the IMF has great economists and often has excellent advice for its member countries. However, no policymaker worth their salt should base their decisions on updated IMF forecasts. We would add that the central bank usually refrains from making comments about monetary policy on the eve of policy meetings.

Looking to the Great White North for a Rate Cut

Speculation is mounting that the Bank of Canada will be the first major central bank to cut rates this year.  It meets on January 20.  The combination of the drop in oil prices (40% since mid-October) and the erosion of the business outlook have boosted the risk of a cut next week.  The bitumen from Canada’s oil sands, which is a type of crude oil, reached a low of nearly $8 earlier this week, which is a tenth of its from two years ago.

An Unusual Policy Move by Sweden’s Riksbank

Many countries may look with envy upon Sweden.  Growth last year was probably around 3%, with household consumption rising a little more than 2%.   Its current account surplus is 7.5% of GDP.  Exports were up by 4.3%.  Its budget deficit is around 1% of GDP.  Yesterday, Sweden reported its manufacturing PMI rose to 56.0 from 54.9 in November.  This is the highest since March 2014.

How Long Can Interest Rates Stay Low?

When a central bank lifts interest rate targets by 0.5% it expects households and firms to respond. In a crisis, the official target may fall by 3% in order to shock the economy into a positive response. These movements of interest rates by the central bank are an important tool of macroeconomic adjustment.

They are also relative to the longer term, or normal rate of interest in the economy. What is interesting now is that rates have been low for quite a long time suggesting the natural rate of interest in the economy has fallen permanently.

Japan’s Central Bank Tweaks its Monetary Policy

The Bank of Japan was the fourth major central bank to meet this week.  Sweden and Norway kept policy unchanged.  The Fed hiked.  There was no expectation that the BOJ would do anything.  Governor Kuroda surprised the market with largely operational tweaks to what Japan calls Qualitative and Quantitative Easing.

Initially, and perhaps with the help of headline reading algos, the yen sold off and Japanese shares rallied.  As cooler, or perhaps human, heads prevailed, the markets reversed.