Central Bank Views

FOMC raised the fed funds target range, by +25 bps, to 0.75%-1.00% with 9-1 vote. Minneapolis Fed President Neel Kashkari dissented as he favored leaving the monetary policy unchanged. The Summary of Projections (SEP) shows virtually the same macroeconomic outlook. Moreover, the median dot plot maintained three rate hikes this year and in 2018. Chair Janet Yellen noted that that the projections have not included potential fiscal stimulus promised by President Donald Trump. She also noted that the Committee discussed on balance sheet policy but no conclusion was reached. The market was disappointed, reflected in the decline in US dollar and Treasury yields, as they had anticipated more hawkish statement and some upward adjustments in economic forecasts.

FOMC is highly likely to raise its policy rate, by +25 bps, to a range to 0.75-1% in March. With a March rate hike a done-deal, the market focus turns to the future monetary policy stance. We expect two more hikes, one in June and one in September, this year. Given the recent improvements in employment and inflation, the market has begun talking about four rate hikes in 2018. For now, we stick to three, as suggested in December's dot plot. The market is currently pricing in three 25-bps hikes this year and two for 2018. The Fed's updated Summary of Projections (SEP) would be released with fan charts added for the first time.

Despite no change in the policy rate and the QE program, the euro gained after the ECB announcement, as President Mario Draghi added some upbeat flavors at the press conference and as the staff upgraded the inflation forecasts. The members continued to see risks to growth skewed to the downside, but agreed that they are "less pronounced" now. While the forward guidance in the statement maintained that "interest rates will stay low, or lower for an extended period of time", the members had discussions of its removal at the meeting. The single currency rose from a 3-day low of 1.0523 to as high as 1.0615 against US dollar. The pair gained +0.34% for the day. Global yields were also driven higher on possibility of a chance in ECB's policy measures. The 10-year German bund yield added +5.6 bps to 0.421% at close, whilst the 10-year US Treasury yield climbed further higher to about 2.6%.

As expected, RBA left the cash rate unchanged at 1.5% in March. Despite few changes in the monetary statement, policymakers appeared more upbeat on both the global and domestic economic outlook. The major change on RBA's view was on the housing market with the central bank now seeing the conditions 'strong' and prices 'rising briskly' in some markets. On the monetary front, RBA acknowledged further rate hike is coming in the US and 'there is no longer an expectation of additional monetary easing in other major economies'. With no explicit guidance on RBA's monetary policy outlook, we see it maintain a neutral bias with future rate decision dependent on incoming data.

As widely anticipated, BOC kept its monetary policy unchanged with the overnight rate at 0.5%, the Bank rate at 0.75% and the deposit rate at 0.25%. The central bank acknowledged that both global and domestic economic indicators were consistent with its projection of improving growth laid out in January. It also note Canadian growth in 4q16 came in 'slightly stronger than expected'. However, policymakers maintained a cautious tone noting that 'material excess capacity' remained and that the central bank is 'attentive to the impact of significant uncertainties weighing on the outlook'. Therefore, the risks and slacks in the economy justified leaving the policy rate at exceptionally low level.

The FOMC minutes for the January meeting were a hawkish one. Many members expressed the view that it would be 'appropriate' to increase interest rate again 'fairly soon'. A few of them suggested removing policy accommodation in 'a timely manner'. However, there was no indication that it should arrive in as soon as March. Indeed, more clarity on the fiscal stimulus plan is needed before the members could decide on the timing of the rate hikes. While the general outlook to the economy remained upbeat (the description on the employment market was especially constructive),'a few' members were concerned about downside risks to the inflation outlook.

RBA minutes for the February meeting contained little news. Indeed, it reinforced our view that the central bank would leave the monetary policy unchanged for the rest of the year. The market currently prices in further rate cut this year, followed by rate hike in 2018. The central bank acknowledged the -0.5% GDP contraction in 3Q16. While attributing most of the weakness to temporary factors including 'disruptions to coal supply and bad weather', policymakers also warned that 'slower growth in consumption had also been a factor'. However, they assured that such weakness should not have continued into 4Q16. On the growth outlook, the central bank suggested that 'GDP growth was expected to pick up to around +3% in year-ended terms later in 2017, and to remain above estimates of potential growth over the rest of the forecast period'

Investors viewed Fed Chair Janet Yellen's testimony before the Senate Banking Committee as modestly hawkish. As such, expectations for a March rate hike rose modestly while Treasury yields climbed higher. While reiterating that all meetings are 'live' for a rate hike, Yellen warned that waiting too long to remove accommodation would be unwise'. Meanwhile, she cautioned over the uncertainty over the economic policy under Donald Trump's administration. Yellen emphasized the Fed's monetary policy stance is not based on 'speculations' about fiscal policy. The economy's 'solid progress' is what is 'driving the policy decisions'.

As expected, RBNZ left the OCR unchanged at 1.75%, following three rate cuts in 2016. The policy statement has changed to a more neutral tone from an accommodative one previously. Yet, the central bank's rate hike forecasts stay at a slower pace than what the market has priced in. Policymakers acknowledged that economic growth has 'increased as expected and is steadily drawing on spare resources'. The outlook remain s positive. It also acknowledged the return of headline CPI to the target band, and judged it would gradually move to the midpoint of the band. We expect the OCR would stay unchanged for the rest of the year.

As widely anticipated, RBA left its cash rate unchanged at1.5% in February, its first meeting in 2017. Policymakers acknowledged improvement in the global economic outlook. They also retained the view that the domestic economy would growth above-trend. The overall monetary stance is neutral, signaling the central bank is in no hurry to adjust the policy. The market is closely awaiting Governor Philip Lowe's speech on Thursday and RBA's Statement on Monetary Policy (SoMP) on Friday. The SoMP would reveal policymakers' updated economic forecasts. We expect downgrades of both growth and inflation outlooks.

BOE voted unanimously (9-0) to leave the Bank rate unchanged at 0.25% and the asset purchases program at 435B pound for UK gilts and 10B pound for non-financial GBP investment-grade corporate bonds. The members revised the growth forecasts significantly higher but left the inflation outlook largely unchanged. The latter was mainly due to the judgment that the labor slack was more than previously expected. Despite stronger growth outlook, Governor Mark Carney warned of the uncertainty over Brexit, cautioning that "there will be twists and turns along the way". While he reiterated that "we can see scenarios in either direction" for policy, we expect BOE to leave the monetary policy and the QE program unchanged at least in the first half of the year.

FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of +25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be 'data dependent'. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate'. The market has only priced in 2 rate hikes this year, although the December dot plot signaled there might be 3. CME’s 30-day Fed fund futures suggested a 17.7% chance of rate hike in March, down from 20.3% prior to FOMC meeting. Yet, they priced in a 38.8% chance in May, compared with 37.7% the day before the meeting.

As expected, BOC left its overnight rate unchanged at 0.5% in January. Yet, it delivered a more dovish than expected message and sent CAD to a one-week low against USD. At the press conference, Governor Stephen Poloz revealed that 'Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy'. He suggested that further rate cut cannot be ruled out of US' protectionist policy puts BOC's inflation target at risk.

RBA in its minutes for the December meeting cautioned the high levels of household debt due to low interest rates. It also warned of the 'considerable uncertainty' in the labor market. The central bank maintained a neutral bias at the meeting while leaving its cash rate unchanged at historic low of 1.5%. Note the meeting was held a day before the release of 3Q15 GDP growth which shrank -0.5%.

Of the three major European central banks held monetary meeting on Thursday, all left their policy rates unchanged. Moreover, all pointed to higher uncertainty in the global economic outlook. BOE kept its Bank rate unchanged at a record low of 0.25%. The sizes of government and corporate bond purchases also stayed unchanged at435B pound and up to 10b pound, respectively, in December. Policymakers warned that the recent strength in sterling might cool inflation in the medium-term. SNB held deposit rate steady at -0.75%, while Norges bank left kept its deposit rate steady at 0.5%.

The Fed increased the policy rate by +25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy.

ECB surprised the market by announcing tapering plan for its bond purchases program. The Governing Council decided to extend the program until December 2017. However, the pace would slow down to 60B euro per month from April 2017, compared with the current 80B euro. The market generally anticipated ECB to extend the program for 6 months without changing the pace of purchases. The market was disappointed. German yields spiked to a one-year high. The single currency soared to a one-month high of 1.0872 immediately after the announcement. However, gains were erased with EURUSD dropping more than -1%, as ECB left the door open to extend QE further beyond December 2017 and/or pick up the pace of bond buying again if the economic conditions deteriorate. Despite disappointing in first sight, the ECB has indeed delivered more than the market had anticipated: 9 months*60B euro = 540B euro vs consensus of 6 months*80B euro = 480b euro. Has the ECB has again disappointed the market by doing more?

BOC, as widely anticipated, left the policy rate unchanged at 0.5% in December. The central bank maintained a dovish tone as in recent meetings. While acknowledging that global market conditions have 'strengthened', 'undiminished' uncertainty has continued to undermine 'business confidence and dampening investment in Canada's major trading partners'. Of particular note is that BOC explicitly indicated its different from the Fed, attempting to dampen hopes that BOC would follow the Fed in raising interest rates. It also attributed the recent increase in Canadian treasury yields to US factors, instead of domestic fundamentals. We expect BOC to leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017.

RBA left the cash rate unchanged at 1.5%, as widely anticipated. Little news was seen in the accompany statement with the more notable change was policymakers' acknowledgement in the rise in commodity prices. However, they stopped short of projecting its impacts on growth, for now. Today's announcement lacks indication for the central bank's monetary policy outlook. We expect future moves remain data-dependent but the central bank is not urgent in making another change in the policy rate.