Central banks in focus
0
Central bank announcements and policies are important to markets and in the US, Fed officials have sought to clarify last week’s FOMC statement and comments made by Chairman Bernanke at the FOMC press conference. Notably, NY Fed President Dudley struck a dovish tone, emphasizing that “the labor market still cannot be regarded as healthy” and highlighted that QE may persist at high levels if FOMC forecasts fall short of expectations (and as he put it, “this is what has happened in recent years”).
Meanwhile the People’s Bank of China (PBoC, China’s central bank) issued a statement on June 25th confirming the injection of liquidity into some financial institutions with the accompanying statement that it expects “the spike of interbank rate and liquidity tightness to ease gradually.” The period of “teaching them a lesson” seems to be over, with the PBoC having spelled out its requirements for commercial banks involving promotion of liquidity and asset -liability management. The central bank has also said that commercial banks should prudently avoid irrational behaviour, with large-sized commercial banks helping with market stability. The quid pro quo for financial institutions following prudent credit policy to support real economy and showing stable loan and credit growth is that the central bank will provide liquidity support in the case of temporary shortage.
Looking forward to next week, the ECB meet and their press conference will be carefully scrutinized for its degree of ‘dovishness’. While improving data, especially in the form of Purchasing Manager surveys suggest that no policy easing is warranted, the ECB is still expected to s tress a relatively dovish stance, in part because in comparison with the US, Euroland has only started to stabilize recently and at very subdued levels, and the ECB is not overly bullish on growth prospects, and in part because the ECB is likely to want to counter its June press conference. The latter was perceived as being on the more hawkish side, with the market preferring to focus on Mr Draghi’s comments on improving survey data, rather than on the fact that the ECB continued to keep the door open to the possibility of a negative deposit rate.
The briefings provided by ECB members in advance of their meeting seem to reflect an appetite to distance the ECB from what was last week’s perceived stance of the Fed on quantitative easing, and whilst the ECB is widely expected to acknowledge that recent data, especially in the form of the PMIs, have improved, it is also expected both to continue to stress that the risk to economic growth in Europe remains to the downside and to point to the possibility of negative rates if economic activity falls short of the ECB’s subdued projection path.
It may be a challenge for the ECB to convince markets that policy will stay accommodative, but this could be done by introducing forward guidance for interest rates. The ECB has already introduced forward guidance on liquidity with the ECB deciding in May to promise unlimited, fixed-rate funding for as long as needed and at least for one year. The ECB’s low inflation forecast, which at 1.3% is well below its price stability objective, provides ample scope for forward guidance on rates also. Since price stability is the ECB’s mandate, forward guidance on rates needs to be associated to the price level, and providing LTROs at a fixed rate rather than at the current rate, which is indexed to the average future path of the re-financing rate, could make this forward guidance more explicit. The ECB might shy away from this sort of commitment but we can expect the ECB to stress that monetary policy will remain very easy for quite some time yet.
With the Bank of England, their meeting and announcement on Thursday will be the first with Mark Carney as governor. Given that he will have only officially started on Monday, it looks too early to expect any significant announcement but a move to provide forward guidance looks to be a significant possibility in August or September, and we will watch the August Inflation Report.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
