In September, five powerful central banks met, and market participants watched and listened with more than usual interest. Over the last year, central banks have become driving forces in the financial markets. The outcomes of their periodic meetings are of increasing importance to global investors and traders, politicians, and corporations…in fact, to anyone involved in global trade and markets.
Here are the primary takeaways from those central bank meetings:
- NO big surprises
- Monetary policies are DOVISH
- EASING will continue
- Quantitative Easing (QE) IS RETURNING
Central bankers appear frustrated by their current lack of effectiveness in avoiding economic slowdowns. As a result, some are putting pressure on their respective governments to expand fiscal policy – increasing spending and lowering taxes. The European Central Bank (ECB) is leading the way, and we expect others to follow.
Here is a list of those five central banks’ meetings -– outcomes and takeaways:
1) US FEDERAL RESERVE – On September 18, the Fed’s Federal Open Market Committee (FOMC) voted to cut rates by 25 bps, reducing the target range to 1.75%-2.00%. The committee also lowered the interest rate of required and excess reserves by 10 bps to 1.70%.1
- The Fed met expectations that it would institute a cut as “insurance”. It cited “implications of global developments on economic outlook as well as muted inflation pressures.”2
- Projections of the 12 FOMC members (the “dot plot”) showed no further lowering. In fact, members were split on the path going forward. So, traders are calling this a “hawkish” rate cut.
- The reaction in financial markets was muted. The US Dollar index jumped 0.3% after the announcement, but ended the day nearly flat; US 10-year Treasuries were flat; and equities moved slightly higher.3
- What’s next? Traders expect another 25 bp rate cut in Q4, and probably one more mid-year 2020. A Fed “QE-lite” may begin in November; the Fed’s balance sheet may increase by as much as $15 billion per month.4
2) EUROPEAN CENTRAL BANK – On September 12, the ECB made a number of key policy changes: 1) rates were cut by 10 basis point to a record low minus 0.50%; 2) “tiering” was set up to exempt some banks from the resulting charge on their deposits at the ECB; 3) a new round of refinancing operations was instituted; and 4) Quantitative Easing was relaunched through the purchasing of up to €20Bn ($22.15bn) of debt securities per month.5
- The ECB was pointedly dovish, citing sluggish economic conditions in Europe requiring another dose of accommodative monetary policy.
- Traders were not surprised; a short-covering rally led to a 1% gain in the euro by end of day. Note that more monetary stimulus by the ECB means printing more euros, which should be a head wind for further euro strength.6
- Christine Largarde takes the helm of the ECB from the retiring Draghi in November. She faces an enormous challenge in persuading a diverse array of European countries to consider a fresh approach. Draghi established the role of the ECB in this undertaking with his statement “it’s high time for fiscal policy to take charge,” targeting Eurozone countries with big current account surpluses, namely, Germany and the Netherlands.7
- What’s next? Traders anticipate another 10bp cut and expect the ECB to increase monthly asset purchases in Q1.8
3) BANK OF ENGLAND – On September 19, the BOE’s Monetary Policy Committee (MPC) voted unanimously to keep the Bank Rate at 0.75%, and to maintain current levels of QE at £10 billion, including the reinvesting of maturing bonds.9
- The BOE met expectations. They said they are responding to current events, citing Brexit uncertainties and their potential impact on UK economic performance, with the aim of keeping inflation near its 2% target.
- The UK pound rallied on the news – up 0.75% on the day, closing above $1.25 and its highest close since July. The FTSE 100 gained 0.50% and Gilt yields fell 2 bps.10
- What’s next? Interest rates and QE should remain unchanged at least through the end of the year and/or a Brexit event. BOE Governor Mark Carney has said in the past that a no-deal Brexit could likely hit the economy and lead the Bank to cut rates.11
4) BANK OF JAPAN – On September 19, the BOJ kept its benchmark rate at negative 0.05%.12
- The BOJ met expectations.
- Market reaction was mildly bullish: the yen edged up 0.15% by end of day, JGB’s were unchanged, and the Nikkei gained 0.35%.13
- What’s next? It was rather unusual for the BOJ to state that “it will re-examine economic and price developments” at its Oct 30-31 meeting, suggesting a potential easing at that time.14
5) BANK OF CANADA – On September 4, the BOC maintained its target overnight rate at 1.75%.15
- The BOC largely met expectations. The tone was dovish, with a refusal to react to the recent upside surprises in GDP growth or on-target inflation. Instead, the BOC focused on the escalating trade war and its potential impact on domestic and global economies. There was no indication that interest rates will be lowered at their next policy meeting on October 30.
- The market’s reaction was hawkish/bullish. By end of day, the Canadian dollar rallied 0.60%, Canada 10-year bond yields jumped 15 bps, and Canada equities gained 0.75%.
- What’s next? Traders expect no action by the BOC until next June, when odds are 50% for a 25 bp cut.16 We will have to wait and see, as Canadian rates historically have been shown to be highly sensitive to concerns with global economic growth, which remains uncertain.
1 Bankrate.com. “Fed cuts rate by quarter point but is split on further reductions.” September 18, 2019
2 Federal Reserve Bank. “Federal Reserve Issue FOMC statement.” September 18, 2019
3,4,6,8,10,13,16 Bloomberg 2019
5 Europa.eu. “Monetary policy decisions – European Central Bank.” September 12, 2019
7 The Guardian. ”ECB announces fresh stimulus as Eurozone economy falters.” September 12, 2019
9 Bank of England. “Bank of England base rate.” September 19, 2019
11 The Independent. “Brexit: No Deal could wipe 5.5 percent off economy.” September 4, 2019
12 The Japan Times. “Bank of Japan mulled another rate cut at September Policy Board meeting.” September 30, 2019
14 Reuters. “BOJ keeps policy rate steady, signals chance of easing in October.” September 18, 2019
15 Bank of Canada. “BOC maintains overnight rate target at 1¾ percent.” September 4, 2019