Global Central Bank Watch 18 Jan 2012

Global Central Bank Watch 18 Jan 2012

US
The Fed reiterated in its December FOMC statement that
it expects to hold rates near zero until at least mid-2013,
They also reaffirmed the $400 bn “twist” operation aimed
at reducing/holding down longer-term interest rates, and
the stabilization of their holdings of Agency debt and MBS
by reinvesting principal payments in the same markets
rather than replacing them with Treasuries. As confirmed
by the minutes to the December meeting, the FOMC’s
next policy move to be in the form of strengthening their
verbal commitment to the low for long policy via more
detail on their own policy forecasts and by providing more
information about their policy objectives. At this juncture,
we do not expect additional policy action, but if the
economy takes a turn for the worse with unemployment
trending upward and inflation and inflation expectations
moving lower, their next market action will be in the form
of another quantitative easing, very likely with a focus on
MBS.

Current Mar12 Jun12 Dec12
Fed funds rate 0 – 0.25 0 – 0.25 0 – 0.25 0 – 0.25

Japan
From the BoJ’s perspective, the latest easing measures
will serve to show that it took some sort of action against
the high yen. The focus of forex strategy will thus swing
back to MoF’s currency market interventions. However,
even if MoF does intervene in the markets, the
unsterilized portion in combination with the latest easing
measures will come to only around ￥5trn, thereby limiting
the intervention impact. Moreover, a Fed quantitative
easing (QE3) or ECB easing could send the yen even
higher. We believe that the BoJ’s repeated incremental
easing measures, lacking in any specific target (e.g. price
levels, nominal GDP growth, forex rates), are unlikely to
realize a turnaround in the yen’s uptrend.

Current Jun12
ON rate 0.05 – 0.1 0.10

Euroland
The January ECB meeting and press conference were in
line with expectations, as the ECB left the refi rate, the
marginal lending and the deposit rates unchanged, but
Mario Draghi provided some interesting colour on
currently hot topics. On PSI, he refused to reiterate
Trichet’s mantra that the central bank should not be
affected by the bond exchange. On sovereign funding,
even if he made sure never to explicitly state that the
three year LTRO was designed to help going through
delicate auctions, his prudent assessment of the
operation still suggested that the central bank is indeed
expecting these sort of side effects. He also gave as clear
as possible a signal that the SMP will remain active. This
was further evidenced by Draghi’s statement that the EBA
was unlikely to open another round of stress tests – an
important encouragement for Italian banks to participate
to the auctions. We expect a 25bp refi rate cut in March.

Current Mar12 Jun12 Dec12
Refi rate 1.00 0.75 0.75 0.75

Key rates in the G3 countries

UK
At its present rate the current round of quantitative easing
(GBP75bn, started in October 2011) will run out just
before the February MPC meeting. We expect the MPC to
announce a further GBP75bn at the February Inflation
Report meeting – which equates to GBP5.77bn per week
if conducted between the February and May meetings.
Thereafter we expect another GBP50bn at the May
meeting to be completed by August. That makes a total of
GBP400bn (over 25% of GDP) in the combined QE1 &
QE2 programmes. Given the modestly more optimistic
survey news recently we judge the risks to this forecast of
more QE to the downside.

Current Mar12 Jun12 Dec12
Bank rate 0.50 0.50 0.50 0.50

Sweden
The Riksbank cut rates by 25bps in December, but two
members voted for a 50bps move. The first meeting of
2012 is on 16 February when we expect another 25bp cut.
Current Mar12 Jun 12 Dec12
Repo rate 1.75 1.50 1.50 1.50

Switzerland
The SNB is intervening to limit the upside to the exchange
rate (1.20 vs. EUR). At present it stands around 1.21.

Current Mar12 Jun12 Dec12
3M Libor tgt 0.00 0.00 0.00 0.00

Canada
Although the overall tone of this press release is still quite
dovish, based on the Bank’s admission that the output
gap was somewhat smaller than previously estimated ( a
view expressed by DB in December) and, as a result, the
economy would return to full capacity one quarter earlier,
this release appears to marginally less dovish than the
December 6 release. In light of these comments, and
barring a meltdown in Europe, we have reduced the
probability of any near term increase in monetary stimulus
and continue to expect that the Bank will remain on the
sidelines through the end of the second quarter of this
year. Furthermore, the persisting evidence of stronger
than projected growth in United States and as well as in
Canada, together with headline inflation remaining close
to the top of the Bank of Canada’s 1% to 3% target range
reinforces our view that the Bank will adopt a less
stimulative policy stance early in the second half of the
year.

Current Mar12 Jun12 Dec12
ON rate 1.00 1.00 1.00 1.75

Australia
Consistent with the post-meeting statement, there is little
in these minutes to offer ‘clues’ about the near-term
direction of policy. But that is not unexpected given the
mix of factors facing the Australian economy as discussed
by the Board (and summarised above by us). Above all,
the key factor in the near term will continue to be
developments in Europe. For the Bank to point out as it
does in these minutes that at face value the domestic
economic ‘story’ does not indicate “any strong need to cut
interest rates”, there is little doubt that the Bank’s and (the
market’s) focus will remain squarely on European
developments over coming months. We continue to think
that further rate cuts are likely to be necessary as the
headwinds from Europe impact domestically. We look for
a further 25bp easing in Q1-2012 and a further 25bp
easing in Q2-2012 – taking the cash rate to a mildly
stimulatory 3.75%.

Current Mar12 Jun12 Dec12
OC rate 4.25 4.00 3.75 3.75

New Zealand
Our view, notwithstanding weak growth in the economy’s
productive potential (no more than 2% yoy) such growth
seems unlikely to be sufficient to absorb the present level
of spare productive capacity in the economy until well into
2013. Provided that other risks to inflation are contained,
this suggests little for the RBNZ to begin even a gradual
monetary policy tightening in the first half of next year.
We have decided to push out the timing of our forecast
first rate hike by 3 months to the September 2012 MPS
meeting but would not be surprised if policy remains
unchanged all of next year. In the interim the RBNZ seems
quite disinclined to ease policy further, even though some
further easing might be helpful.

Current Mar12 Sep12 Dec12
OC rate 2.50 2.50 2.75 3.25

China
China’s December CPI inflation came in at 4.1% yoy,
dropping for the 5th month since it peaked in July 2011 at
6.5%. Although the December CPI is slightly higher than
our and market expectations, the lower-than-expected PPI
in December suggests that further CPI disinflation – driven
in part by negative core inflation — will likely continue as
we expected. On mom basis, December CPI was up
0.3%, reflecting an increase in food prices due to
seasonal as well as the Chinese New Year effect. We
believe the monthly average food price will rise further in
January but should fall either in February or March
following the holiday. So far the food price behaviour has
been normal compared with past CNY holiday periods.
Non-food inflation declined by 0.1pct mom in December
(vs an average 0.2pct mom increase in past quarters),
indicating that China has in fact just entered a period of
“deflation” for core CPI. This will provide an environment
conducive for policy easing. We expect 2-3 RRR cuts of
50 bps in 2012.

Current Mar12 Jun12 Sep12
1-year rate 3.50 3.50 3.50 3.50

India
The Reserve Bank of India left key policy rates unchanged
in its December monetary policy review. The central bank
is on an orthodox mode, eschewing multiple instruments
and objectives. Its focus is beginning to shift from inflation
to growth, but the central bank seems keen on addressing
one concern at a time, and hence is refraining from cutting
CRR on one hand to release sizeable liquidity and not
touching the repo rate to maintain vigil on inflation on the
other hand. We expect to see a streamlined set of
measures in 2012; a sharp slowdown in growth and
inflation would be responded with interest rate cuts while
chronic liquidity shortage will be dealt with OMOs (the
statement noted no sign of serious stress in money
markets presently, revealing a lack of urgency in injecting
sizeable amounts of liquidity through a CRR cut). Further,
the RBI also pointed out that the marginal standing facility
(MSF), which market participants can access to get
additional liquidity at 1% higher than the repo rate, has not
been utilized so far, hinting that this facility ought to be
used before resorting to blunt measures such as a CRR
cut. Short of a major manifestation of systemic risks, we
therefore do not expect the central bank to cut the CRR in
a hurry.

Despite WPI inflation having moderated to 7.5% in
December (from 9.1% in November), the RBI is by no
means relaxed about inflation, given the trend in core
prices and the likely pass-through from the recent sharp
fall in the rupee. While the central bank has recently
introduced a number of macro-prudential measures aimed
at stemming speculative pressure on the currency, we
don’t think the central bank expects such measure would
mark a major turnaround of the currency and associated
inflation risks. The central bank’s statements in recent
months have flagged anemic investment, weak external
demand, expansionary fiscal policy, and lack of reform
momentum as major factors that need to be reversed for
growth to pick up. Clearly, the view is that growth cannot
be tackled by easy monetary policy alone, and therefore
expectations of major growth supportive measures from
the RBI should be tempered. With that backdrop, we
reiterate our call for a mid-2012 rate cutting cycle, with
some chance of it starting from March onward depending
on the inflation-growth dynamic.

Current Mar12 Jun 12 Sep 12
Repo rate 8.50 8.50 8.50 7.50

Brazil
The Central Bank cut the SELIC overnight rate by 150bps
between August and November 2011. Monetary easing
was justified by a slowdown in domestic economic
activity, adoption of a tighter fiscal policy by the federal
government, and especially the negative economic
outlook for developed economies. The Central Bank has
downplayed the steady deterioration in inflation
expectations, underpinned by record low unemployment
and a very large increase in the minimum wage
programmed for next year. The authorities have signaled
that they will continue easing monetary policy, a decision
that has been reinforced by the latest economic data,
which have showed sluggish industrial production and
reinforced expectations of slow GDP forecasts for 2012.
Thus, while we still do not expect inflation to return to the
target in 2012 (barring a significant drop in commodity
prices), we expect the CB to implement three additional
50bp rate cuts, bringing the SELIC rate to 9.5% by April
2012.

Current Mar12 Jun12 Dec12
CBR refi rate 11.00 10.00 9.50 9.50

Russia
The board of directors of the Central Bank of Russia ruled
to cut the refinancing rate by 25bp to 8% starting from
December 26. We note that the move does not have a
practical meaning for the monetary policy and is largely a
signaling instrument for the CBR to underscore the
downward trend in inflation. More importantly, the CBR
hiked its deposit rate by 25bp from 3.75% and left the
overnight auction-based REPO rate unchanged at 5.25%.
The increase in deposit rate is supportive for the rouble
dynamics as it makes rouble deposits relatively more
attractive. Effectively, the REPO-DEPO interest rate
corridor was narrowed by 25bp to 125bp. The narrowing
of the interest rate corridor is to decrease the rates
market volatility and is likely to improve the effectiveness
of the interest rate policy of the CBR on the way to
inflation targeting.

In its statement the CBR noted that inflation rate
continued to decrease reaching 6.4% on a 12-month basis
compared to 6.8% in November. At the same time, the
regulator expects the inflation rate to decrease sharply in
the beginning of 2012 due to the shift of the regulated
tariff increase from January 1, 2012 to July 1, 2012,
although mentioning that the effect is likely to be
temporary. Given the slowdown in production, but strong
consumption figures in November macroeconomic data
as well as the international macroeconomic
developments, the CBR notes that the current set of
policy rates is appropriate to manage the growth and
inflationary risks.

According to the CBR, the next meeting is planned to be
held in the beginning of February 2012.

Current Jan12 Mar12 Jun12
CBR refi rate 8.00 8.00 8.00 8.00

Global central bank policy rate changes since August 2009