Thursday Central Bank Derby Results in Japanese Forex Intervention, Many Interest Rate Hikes, and One Bizarre Cut
September 22, 2022
Net overnight movements in the dollar have ranged widely from a 1.8% plunge against the yen to a 1.1% rise versus the Swiss franc. In between, the dollar fell 0.3% versus the euro, Australian dollar, and sterling.
After numerous rhetorical complaints by officials about the weakness of the yen, Japanese officials sold foreign currency directly in the market to support their currency, which yanked the currency from an overnight low of 145.9 per dollar to as high as 140.35. This was only the third intervention episode in the past three decades. The previous instance occurred during the Asian debt crisis in 1998, and it appears that the action was conducted unilaterally and without permission from Japan’s Group of Seven allies. Unless coordinated among several countries, unilateral intervention usually has only a short-lived currency market impact, and that is especially so when one-sided currency movements reflect shifting economic fundamentals, which is the case now. While the Fed and many other central banks have been moving to a restrictive policy stance, the Bank of Japan, whose Board met for nearly five hours yesterday and today, is determined not to copy what other central banks are doing.
The Bank of Japan Board left its short- and long-term interest rate targets at -0.1% and “around zero percent.” The policy strategy of Quantitative and Qualitative Expansion with Yield Curve Control for as long as it is necessary for maintaining the target of 2%+ inflation in a stable manner was reaffirmed emphatically, and Governor Kuroda clarified that that will entail a period of “quite some time.”
Among ten-year sovereign debt yields, the Japanese JGB dipped two basis points today in contrast to increases of 14 basis points in the British gilt and eight bps in the U.S. Treasury.
Equity market screens are mostly showing more red, with Hong Kong’s Hang Seng down 1.6%, Taiwan down 1.0%, and Japanese, South Korean and Indian exchanges closing with a 0.6% loss. Selling pressure in Europe intensified after the U.S. open. The German Dax and Paris CAC have fallen over 1.0%, and so has the Nasdaq. The DOW is teetering just north of the psychological 30,000 level, and SPX has lost over 0.5%.
Alternatively, Bitcoin and WTI oil show solid overnight gains of 3.8% and 3.1%. The price of gold is just 0.3% firmer.
Central bank interest rate cuts were announced today in Switzerland, the U.K., Norway, Taiwan, Hong Kong, Vietnam, Indonesia, the Philippines and Macau. In Turkey, which continues in the grip of reinforcing currency depreciation and accelerating domestic inflation, central bank officials agreed to a full-percentage point rate cut for the second month in a row.
In raising Switzerland’s policy interest rate by a record 75 basis points to 0.50%, Swiss National Bank officials ended a period of negative interest rates stretching back to January 2015. Policy at the SNB is reviewed quarterly, and an initial 50-basis point hike was engineered at the prior meeting. More restraint seems likely: SNB President Jordan warns that “it cannot be ruled out that further increases in the SNB policy rate will be necessary,” and new inflation forecasts were revised sharply higher for 2022 and 2023 even though such embody the impact of today’s rate hike, which had not been foreseen earlier. On-year CPI inflation of 3.5% in August may crest further over coming months, and projected average inflation in 2023 was raised a half percentage point to 2.3%. As before, the central bank reserves the right to intervene when needed to counter franc appreciation. The currency is considered overvalued at its current level.
The Bank of England‘s policy meeting must have had a lively discussion. Only five of the nine members of the Monetary Policy Committee agreed with the 50-basis point size of today’s base rate hike. Three want a hike of 75 basis points, which is what street analysts were anticipating, but one member voted to raise the rate by just 25 basis points. There had also been a 50-basis point increase at the prior review in August, preceded by four 25-bp increases during the first half of 2022 and an initial 15-bp hike in December 2021. The diversity of opinion stems from uncertainty over future energy prices “following the Government’s announcements of support measures including an Energy Price Guarantee,” which is expected to lower and bring forward the the expected peak of CPI inflation. On-year inflation was at 9.9% last month. The central bank base rate level now becomes 2.25%, a 14-year high. Officials were in better agreement regarding a plan to reduce gilt purchases by GBP 80 billion over the next 12 months.
The Bank of Norway‘s policy interest rate was also lifted by 50 basis points today and becomes 2.25%. In six moves over the past year, the rate has risen from zero percent. Guidance suggests that there likely will be a further increase at the next meeting in November. Since officials see some evidence that monetary tightening is constraining economic activity, the hope is that the pace of restraint could become more gradual thereafter. But August inflation was just slightly below July’s 34-year high of 6.8%, but officials retained the caveat that ” our projections are more uncertain than normal.”
The discount rate at the Central Bank of the Republic of China (Taiwan) has been raised 12.5 basis points to 1.625%. That increase follows two earlier hikes this year totaling 37.5 basis points. Inflation slipped in August to 2.66% but is still above target. Growth remains positive.
A bigger full percentage point hike of the State Bank of Vietnam’s refi rate to 5.0% makes up for lost time. It was the first increase since 2022. When the pandemic surfaced, the rate was cut in three moves during 2020 from 6% to 4%, so only half of that relief has been reversed.
Hong Kong pegs its currency to the U.S. dollar, and Macau is constrained to move in tandem to the Hong Kong dollar. Both monetary policies are consequently subordinated to exchange rate objectives. In practicality, that means when the U.S. federal funds rate was lifted 75 basis points on Wednesday, similar increases to 3.5% became necessary at the Macau Monetary Authority and the Hong Kong Monetary Authority.
Bank Indonesia’s policy interest rate was increased today by 50 basis points to 4.25%. That’s only the second increase of 2022. August saw a 25-bp hike, and analysts thought today’s increase would be by that smaller amount. The new rate level remains below its pre-pandemic 5.0%. CPI inflation of 4.7% last month was a bit lower than in July but above the 2-4% target range.
The Filipino central bank interest rate was likewise hiked 50 basis points today also to 4.25%. Such had bottomed in 2020 at just 2.00%, but today’s tightening was the fifth rate since May. Not only is inflation above target, but central bank officials additionally worry about peso depreciation and observe that inflation appears to be broadening into more items. They also observe rising expected inflation.
Late Wednesday came news of an unchanged 13.75% Brazilian Central Bank Selic interest rate. But two dissenters from the majority favored a 25-basis point hike to 14%. Monetary tightening between March 2021 and August 2022 had totaled 1175 basis points.
While most countries seems to be running away from inflation, Turkey seemingly is taking steps to bring it on. Turkish CPI inflation has accelerated to 80.2% versus a target of 5%, and the lira had collapsed 45% since September 2021. From 19%, the rate was lowered to 14.0% in the final four months of 2021, and after a pause, has now been cut by another percentage point each in August and September of this year. Monetary policy independence has been severely eroded in Turkey. President Erdogan believes that raising interest rates lifts inflation, and vice versa. Today’s TCMB statement today defends its cut additionally by blaming inflation on many exogenous developments:
Increase in inflation is driven by the lagged and indirect effects of rising energy costs resulting from geopolitical developments, effects of pricing formations that are not supported by economic fundamentals, strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices. The Committee expects disinflation process to start on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability along with the resolution of the ongoing regional conflict.
Several economic data were reported today, some of which are significant.
The U.S. current account deficit narrowed to $251.1 billion last quarter from $282.5 billion in 1Q, but was much wider than $206.4 billion in the second quarter of 2021. As a percent of GDP, the deficit climbed to 4.3% in the first half of 2022 from 3.6% in 2021, 2.9% in 2020 and 2.2% in 2019.
U.S. new jobless insurance claims stayed very low last week at 213k, corroborating the Fed’s assertion of a tight labor market.
Overall French business confidence dropped to a 17-month low in September of 102.1. It had crested 7 months earlier at this year’s high of 112.6. Manufacturing and services printed at their lowest values since March 2021 and January 2022, respectively.
Danish consumer confidence sank 7 index points to a record low of -32.1 in September. It was +8.2 in September 2021.
Belgian consumer confidence plunged from -11 in August to a 37-year low of -27 this month.
But Turkish consumer confidence continued to recover, strengthening to 72.4 this month from a record low of 63.4 in July.
Lebanon’s inflation is twice as high as Turkey’s. But at 162% in August was down from 239.7% last January.
The U.S. index of economic indicators posted a monthly decline for the fifth straight time in August, this time of 0.2%.
Euroland consumer confidence dropped 3.8 points in September to a new alltime low going back almost four decades.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bangko Sentral Ng Pilipinas, Bank Indonesia, Bank of England, Bank of Japan, Bank of Norway, Central Bank of Brazil, Central Bank of the Republic of China (Taiwan), Central Bank of Turkey, Hong Kong and Macau Monetary Authorities, State Bank of Vietnam, Swiss National Bank, U.S. current account