Pressure On Central Bankers
BoJ Kuroda and his monetary policy stance
RBA Interest Rate Hike
ECB Rates Decision
Kuroda Presses Forward on Quantitative Easing
If you’re thinking why are we looking into BoJ’s monetary policy stance? Then hopefully this can bring some light to your understanding.
Simply put, if not for Governor Kuroda and the BoJ doing what they have been doing, with QE, in the current environment bond yields would be through the roof and tech stocks would be finished. Something I took away from Weston Nakamura, he’s got a great viewpoint on macro topics; nonetheless, it’s the truth, the single largest holder of U.S treasuries is the BoJ.
So ask yourself this, providing the BoJ were to move away from their loose monetary policy what would the ripple effect be in global markets?
The Bank will persistently continue with the current powerful monetary easing centered on yield curve control. —said Kuroda
What’s the reason for the massive losses on Yen crosses? Simply, investors are shifting their focus toward the ever-widening interest rate differential between the BoJ and Fed among other central banks. If you are a central bank or a large financial institution, say a pension fund or asset management firm and you have FX exposure on your books, the last place you would want to hold that would be in a currency like the Yen as their interest rates are negative 0.1%. Instead, you would look at the likes of the U.S, even the UK with rates now at 0.75%; it all revolves around opportunity cost and where the best yield/safety of principal lies.
So as long as the BoJ keep its monetary policy loose and major central banks continue hiking we can expect to see weaker Yen rates. Remember, everything is interlocked.
RBA Hikes Rates
The RBA is another central bank that is known to adopt Yield Curve Control as a tool to support monetary policy. The RBA announced in March 2020 that it would buy bonds in unlimited quantities in order to cap the three-year yield at the overnight cash rate. The aim of yield curve control is to stimulate the economy when short-term interest rates are already at zero. However, in the case of the RBA governor Phillipe Lowe said it would be unlikely for the central bank to adopt the policy again due to their experience post the Covid crisis.
Earlier this week we saw the RBA surprise markets with an outsized hike of 50bps taking rates to 0.85% vs 0.65% expected.
This is what Governor Phillipe had to say:
The board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead. The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.
Normalisation, normalisation, normalisation — seems to be the policy word of the year if you ask me. Now, although the RBA is not a huge market player it’s still important to keep a top-level view of what’s circulating.
ECB Policy Decision
Ok, let’s look at what we already know.
We heard from ECB Chief Economist Philip Lane last week where he pointed toward a 25bps hike in July followed by another 25bps in September. We also are aware of the ECB’s plan to terminate its PEPP program sometime in Q3. Finally, since the invasion of Ukraine, we’ve heard and seen forecasts of stagflation in the eurozone which is more likely as growth forecasts are slashed even more per revision.
As we know, the neutral rate for the ECB sits in the range between 1-2%, current rates are sitting at negative 50bps. Now you’re probably thinking, why on earth has the ECB kept rates negative when inflation is at 8.1%? Honestly, I don’t have the exact answer; but when looking at the situation closer you realise there’s an even bigger issue at hand. As it stands output and inflation are moving in opposite directions, so there’s a trade-off to be made between growth and inflation. From the way things are lining up, it’s clear that the sacrifice will be growth.
As for now, I’m waiting for the mammoth releases expected to come in both Thursday and Friday to dive in much deeper— for now, I hope you enjoyed this read and I’ll catch you on Friday.