Parade of Other Central Banks

June 17, 2021

Markets had reacted late Wednesday to the Federal Reserve‘s signal that its initial interest rate hike is likely to occur during 2023, rather than 2024 as implied previously. Several other central banks had scheduled policy reviews whose results were learned subsequently.

At the time of the opening of U.S. stock market trading on Thursday, the dollar showed a 0.7% weighted advance overnight, with gains of 0.8% versus the Turkish lira, 0.7% relative to the Swiss franc and Chinese yuan, 0.5% versus the euro, 0.4% relative to the Aussie dollar, and 0.3% against the loonie. The dollar also had slipped 0.3% against the Japanese yen. While the 10-year Treasury yield had given back two basis points from the big initial post-FOMC rise, comparable sovereign debt yields had climbed 7 basis points in Germany, 6 bps in France and the U.K. and 5 basis points in Italy. Gold had tumbled 4.2% and was below $1800 per ounce. WTI oil had eased 0.4%. Stock markets followed the U.S. southbound lead in Japan, Australia, New Zealand, South Korea and the U.K..

The Central Bank of Brazil’s Selic interest rate as expected was raised by 75 basis points to 4.25%. That move had been expected and follows similar incremental moves undertaken in March and May. A released statement moreover signals another 75 basis point hike at the committee’s next scheduled review and a likely rate level of 6.25% by the end of this year and 6.5% in 2022 as officials restore a neutral policy stance. Inflation has spiked close to 6%, which is higher than officials were expecting, and recovery risks have diminished.

Officials at the Central Bank of Turkey left its reverse repo rate at 19%, vowing to maintain a rate level above inflation “to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached,” according to today’s released statement. Turkish CPI inflation had catapulted from 11.75% in September 2020 to 17.14% in April, prompting official to lift their policy interest rate by a total of 1075 basis points in four moves, the most recent of which was a 200-basis point hike in March. Much of the acceleration of inflation stems from higher commodity prices and other global factors, but officials are worried about elevated inflation expectations. President Erdogan has already fired a prior TCMB chief in protest against the bank’s tighter stance.

The National Bank of Ukraine is on the short list of central banks that have already raised interest rate this year, having lifted its policy rate by 50 basis points in March and by a further 100 basis points to 7.5% at its review in April. As elsewhere, CPI inflation in the Ukraine has risen more sharply than expected this year, reaching 9.5% in May. Officials at NBU did not change the policy rate further at this week’s review and attribute to recent spike to short-term factors that are expected to fade. In a released statement, they do announce plans to phase out the use of anti-crisis monetary tools and project a return of CPI inflation to the 5% target during the first half of next year. But the statement also concedes that expected inflation is elevated and makes a commitment to raise the interest rate further if stronger underlying inflationary pressure emerges and threatens achievement of the bank’s goal.

The zero percent one-week repo rate of Norges Bank was not changed, either, at the latest review by Norwegian monetary authorities, but forward guidance was tweaked to suggest that an initial rate hike of 25 basis points is probable in September rather than December and that a second increase in December is likely too.  Projected GDP growth next year has been revised upward by 0.7 percentage points to 3.4%, and the central bank is likely to average 1.3% in 2023.

Monetary policy at the Swiss National Bank, which is reviewed on a quarterly basis, was not materially changed despite a marginal upward revision in projected inflation. According to a released statement, the sight deposit rate will remain at minus 0.75%. Officials still consider the franc overvalued and reserve the right to intervene when necessary to temper its strength. Industrial capacity is expected to be undereutilized for some time yet, and projected average inflation remains very low at 0.4% this year followed by 0.6% in 2022 and 2023.

Taiwan’s discount rate has been 1.125% since a 25 basis point cut in March 2020 and will remain at that level according to a statement released by the Central Bank of the Republic of China (Taiwan). Expansive monetary policies have been maintained in the major economies, along with large fiscal stimuli. Once the recent spike in inflationary pressure abates, officials project the CPI in Taiwan to return to a mild state. Monetary policy will continue to prioritize fostering the economic recover and ensuring financial stability.

The seven-day reverse repo rate at Bank Indonesia was lowered earlier this year in February by 25 basis points. That cut followed five such reductions during 2020 and brought the policy rate down to 3.5% where it will remain following the latest review of Indonesian monetary policy.  Indonesia dealt with rising Covid cases in the first quarter. Inflation is expected to stay within the 2-4% target range, and growth promotion to the main need at this time. GDP is expected to rise at least 4% this year.

New Zealand real GDP (+1.6% in 1Q 2021) climbed three times faster than forecast. In year-on-year terms, growth improved to +2.4% from -0.8% in 4Q 2020 and zero percent in 1Q 2020.

Australia’s labor market in May also far surpassed analyst expectations. The jobless rate dropped to 5.1% from 5.5% in April. 115.2k jobs were created (beating forecasts by a factor of almost four), and labor market participation increased 0.2 percentage points to 66.2%.

A 2.0% May year-on-year rate of CPI inflation in Euroland estimated a few weeks ago has been reconfirmed. That rate constitutes a 31-month high and a 0.4 percentage point acceleration from April’s result. Core inflation of 1.0% climbed by 0.3 percentage points to a 3-month high. Energy prices had tumbled 11.9% in the 12 months through May 2020 but climbed 13.1% in the ensuing year. Service sector price inflation of 1.1% was down from 1.3% in May 2020, and the food component only rose 0.5%, down from 3.4% during the year ending in May 2020.

A 4.1% rise in construction output in the euro area during March was flanked by monthly declines of 2.1% in February and 2.2% in April. Against the extreme pandemic shutdown conditions of April 2020, construction in April was up 42.3%.

Chinese house price inflation rose to an 11-month high of 4.9% last month. The month-on-month increase of 0.6% matched April’s 8-month high. Chinese foreign direct investment in May was 35.4% greater than a year earlier.

South African retail sales posted an unexpected second straight monthly decline, this time of 0.8% in April but still surpassed its year-earlier level by a record 95.8%.

In spite of a 37k increase in new U.S. jobless insurance claims to a four-week high of 412k, the four-week average dropped below 400k for the first time since the pandemic’s onset. A downward trend remains intact. The Philly Fed manufacturing index fell to a 4-month low of 30.7 in June from 31.5 in May and 50.2 in April.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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