Considerable Central Bank News and a Whole Lot More

September 23, 2021

The takeaways from Fed Chairman Powell’s press conference yesterday are that a tapering of Fed bond purchases could begin as soon as right after the next scheduled FOMC meeting and should be drawn down to zero by mid-2022, plus the lift-off date for the fed funds target could occur next year rather than in 2023.

Late Wednesday came the additional news from the Central Bank of Brazil of another full percentage point increase in the Selic interest rate to 6.25% along with a statement that another 100 basis point rate hike is probable at the committee’s next review. “At the present stage of the tightening cycle, this pace is the most appropriate to guarantee inflation convergence to the target at the relevant horizon and, simultaneously, allow the Committee to obtain more information regarding the state of the economy and the persistence of shocks. At this moment, the Copom’s baseline scenario and balance of risks indicate as appropriate to advance the process of monetary tightening further into the restrictive territory.” Today’s move was the fifth one of the sequence that began from a record low Selic rate level of 2.0% in March.

Central bank rate normalization has begun in Norway. Officials of the Bank of Norway at today’s scheduled policy review decided to increase their policy rate by 25 basis points to 0.25% from a record low of zero percent. This action reverses a 25-bp cut in May 2020 that followed two reductions in March totaling 75 basis points in March. A statement suggests that all of those cuts are likely to be reversed by the end of next year. Amid economic growth and falling unemployment and capacity slack, inflation is rising and expected to climb further towards the 2% target. Vaccinations are being counted upon to contain the negative impact of Covid.

The Bank of England’s message was much like the Fed’s. While keeping the base rate pinned at 0.10% and maintaining quantitative stimulus at the recent pace, there were two, up from one, dissenters who favored cutting back the central bank’s pace of government bond purchases. A released statement revised down projected third-quarter British GDP growth to 2.1% from 2.9%, citing Covid, but also strikes a more worried tone about inflation, which they believe will be twice the 2% target by yearend and stay above 4% until around mid-2022.

At its previous meeting, the Committee judged that, should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term. Some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain.

Other central banks that made news today weren’t so inclined to embark on some sort of rate normalization.

For instance, a record low 1.125% policy interest rate is being maintained at Central Bank of the Republic of China (Taiwan). Taiwan’s “current inflation upswing is viewed to be transitory and inflation is expected to be mild for this year as a whole, with next year’s inflation outlook tilting to the downside. In terms of economic growth, the global recovery remains on track, though still facing multiple uncertainties.”

A record low overnight repo rate was maintained by the Central Bank of the Philippines, too. It’s been at 2.0% since five cuts in 2020 totaling two percentage points and culminating last November. A released statement from Bangko Sentral ng Pilipinas concedes more upsidedly tilted short-term inflation risks but predicts a more balanced outlook for prices thereafter. Moreover, the growth outlook faces continuing uncertainties. ” The BSP stands ready to take appropriate measures as necessary to ensure that the monetary policy stance remains in line with its price and financial stability mandates.”

The latest quarterly review of Swiss National Bank monetary policy stands its ground. Sweeping changes established the current stance way back in mid-January of 2015 when officials took a deep dive into negative interest rates and replaced a program of automatically capping the franc per euro ceiling at CHF 1.2000 with a promise to intervene on a discretionary basis as deemed necessary to counter an overvalued franc from getting even stronger. The policy rate on sight deposits has been at -0.75% since January 2015. Today’s statement from the SNB revises projected 2021 GDP growth down a half percentage point to 3.0%, raises the near-term trajectory of CPI inflation marginally through the third quarter of 2022, but leaves projected inflation thereafter unchanged and thus woefully under target. As late at mid-2024, on-year CPI inflation is projected to be only 0.8%.

The policy interest rate at the South African Reserve Bank was left at 3.5%. A 25 basis point hike next quarter seems probable but isn’t guaranteed. The rate was slashed in five moves by 300 basis points during the first seven months of 2020 but has been steady subsequently. In a released statement, the forecast growth rate in 2021 is revised up to 5.3% from 4.2%. Most of the recovery lies in the past. “the spread of the Delta variant, higher global inflation, and uncertainty about the normalization path for interest rates continue to cause financial market turmoil and capital flow volatility.” But “While economic activity continues to expand over the forecast period, a rise in core inflation is moderated by the current strength of the exchange rate and modest unit
labor costs.” For now a highly accommodative monetary stance seems appropriate.

The biggest central bank surprise move today was made in Turkey, where officials of the TCMB slashed their one-week repo rate by a full percentage point to 18.0% even though inflation keeps cresting and is currently at a 16-month high of 19.25%. As recently as March 2021, the rate had been lifted by 200 basis points to 19%, and that tightening followed 875 basis points of rate increases implemented in the final four months of 2020. The primary reason given for this policy flip-flop is the observation that “tightness in monetary stance has started to have a higher than envisaged contractionary effect on commercial loans.”

Preliminary September purchasing managers survey findings for Euroland, Great Britain and the United States attest to slower growth but rising inflation amid relentless supply chain disruptions, higher oil prices, and the highly infectious Delta Variant of Covid.

  • Euroland’s composite PMI reading dropped nearly 3 index points to a 5-month low of 56.1 and was about 2.5 points below analyst expectations. The sub-indices for manufacturing and services dropped to respective 7- and 4-month lows.
  • Within the euro area, Germany’s composite PMI fell to a 7-month low of 55.3 this month¬† from 60.0 in August and a record high of 62.4 in July. France’s composite PMI of 55.1 was at a 5-month low.
  • The British composite, manufacturing, and service sector PMI readings of 54.1, 56.3 and 54.6 were each at 7-month lows. Output price inflation touched a record high, while confidence in the 12-month outlook fell to an 8-month low.
  • The IHS-compiled U.S. PMIs were also weaker than predicted. The composite and service-sector readings were each at one-year lows of 54.5 and 54.4, while the manufacturing index (60.5) dropped to a 5-month low.

In other U.S. data news, weekly jobless insurance claims again surpassed forecasts, rising to a 4-week high of 351k last week, and the Chicago Fed National Activity index fell back from 0.75 in July to 0.29 in August, which was only the fourth best result among the first eight months of 2021.

Overall French business confidence edged up one index point to a 2-month high score of 111 in September, but confidence in the manufacturing sector dropped by four index points to a 5-month low of 106.

There’s been a substantial downward revision to second-quarter Spanish GDP growth from a quarter-on-quarter increase of 2.8% reported initially to 1.1% measured now. GDP had contracted 0.6% in the first quarter. After tumbling 21.6% on year between 2Q 2019 and 2Q 2020, the latest year-on-year growth comparison is +17.5%. GDP was augmented mostly by personal consumption last quarter, but net foreign demand exerted a drag on growth.

GDP revisions in the Netherlands were upward by contrast. Second quarter GDP growth was +3.8% versus 1Q and +10.4% (most in over three decades) versus the same quarter a year earlier. Meanwhile, the Dutch current account surplus widened from EUR 12.1 billion in 2Q 2020 to EUR 23.6 billion in 2Q 2021.

Hong Kong’s HKD 68.499 billion current account surplus in the second quarter represents a 3-quarter high.

CPI inflation in Singapore edged down from an 8-year high of 2.5% in July to a 2-month low of 2.4% in August.

Icelandic unemployment in August stayed at July’s 13-month low of 5.1%. Norwegian unemployment fell 0.6 percentage points in July to an 11-month low of 4.2%.

Financial market action so far today has been very volatile. The Dow and S&P enjoyed very strong gains for a second straight day. The German Dax and Paris Cac are up 1.1%. Stocks closed higher by 1.2% in Hong Kong and 1.0% in Australia.Ten-year sovereign debt yields soared ten basis points in the U.K., 7 bps in the United States, and 6 bps in Germany. The price of WTI oil advanced 1.1%, and that of gold is down 1.4% despite a 0.4% drop in the DXY weighted dollar index against other currencies.

Japan was closed for the Autumnal Equinox holiday.

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

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