Central Banks – Who is the Most Dovish of them All?

Economic indicators out of Japan this week have proven to be more of an economic alarm bell than an indicator. What’s next for the BoJ?
Bob Mason
BoJ

The FED and the Bank of Canada,

The FOMC meeting minutes were released on Wednesday and, in stark contrast to the influence of minutes and central bank commentary from elsewhere, the Dollar didn’t sink.

In recent months, there’s been a material shift in monetary policy across a number of central banks, including the FED, though the direction of the Dollar and Treasury yields suggest that there’s not been as much as a shift as some suggest.

The swings in the Dollar and U.S equity markets through the U.S session on Wednesday came from the markets being drip fed the minutes. In the end, while the general consensus was that the minutes maintained a hawkish bias, talk of needing to remain patient on resuming rate hikes was all that the markets wanted to hear.

In stark contrast to the FED’s decision to pause on rate hikes, we have seen the RBA and the ECB take a far gloomier outlook and, when considering recent economic data released out of China and the Eurozone, there’s certainly just cause for the shift.

Neighbouring Bank of Canada was left with little choice but to change its stance on the policy front. In spite of Canada, Mexico and the U.S wrapping up trade negotiations, sliding crude oil prices have weighed on the BoC and any prospects of a rate hike anytime soon.

Bank of Canada Governor Poloz is scheduled to speak later today. Having slashed economic growth forecasts in January, there’s unlikely to be any upbeat commentary from Poloz when considering economic data released out of Canada since the 9th January monetary policy statement.

Moving Eastwards

For the ECB, the asset purchasing program may have come to an end, but what remains are negative deposit rates and all-time low-interest rates that sit at zero. ECB President Draghi’s 8-year term at the end of the ECB is rapidly coming to an end. While Draghi will have hoped for an opportunity to lift rates from historic lows, particularly disappointing economic data suggests that the ECB will be holding deposit and interest rates at current levels through the year. A reintroduction of the asset purchasing program and negative interest rates may also be needed should economic conditions deteriorate further.

Stats out of the EU economic powerhouse Germany have certainly raised material concerns over the outlook, leading to the EU Commission and the ECB to slash growth forecasts. A rollout of tariffs on auto imports into the U.S would add fuel to the fire. All of this comes at a time when the Chinese economy appears to be growing at a slower pace than disappointing GDP numbers suggest.

With China in the doldrums and looking to negotiate its way out of the trade war with the U.S, the RBA has also fallen into the dove trap. The RBA monetary policy meeting minutes released earlier in the week stated that the probability of a rate hike or rate cut were evenly balanced. Just a few months ago, optimism over the economic outlook had led the RBA to indicate that the next move would be up.

The RBA has also cut its growth forecasts and, with wage growth remaining tepid and house prices on the slide, the Aussie Dollar is beginning to slide. The slide comes as the markets begin to consider a possible rate cut later in the year.

Unsurprisingly, the Bank of Japan is high on the dove list. Just earlier in the week, BoJ Governor Kuroda spoke in Parliament, stating that further monetary policy easing would be delivered if deemed necessary. Well, when viewing the latest trade figures, core machinery orders and this morning’s flash manufacturing PMI number, that moment may have already arrived…

The Hawk

With the Bank of England and Governor Carney’s hands tied as Britain struggles to negotiate its way favorably out of the EU, alongside a relatively optimistic FED is the RBNZ.

In spite of the ongoing trade war between the U.S and China and slower economic growth out of China, the RBNZ delivered a surprisingly hawkish outlook on economic growth. The confidence in growth was not enough to shift its language on the likely next move, which remains either up or down, but taking the confidence in isolation, up looked more likely than down at the time of the statement.

The Kiwi Dollar rallied from $0.67275 to $0.68216 through the release of the statements and the RBNZ press conference and has recovered to $0.68 levels, following the 2nd week of February dip. Whether the optimism remains is another question, however.

While a resolution to the U.S – China trade war would certainly support the more optimistic, the damage has already been done if economic data is anything to go by.

Today’s private sector PMI numbers out of the Eurozone and the U.S will provide further guidance on where the respective economies are heading in the 1st quarter. If January’s numbers and today’s forecasts are anything to go by, the FED’s standing as the most hawkish of the central banks seems justified.

The RBNZ may be the hawk from an outlook perspective, but continuing to suggest that rates could go up or down places the Central Bank behind the FED going into today’s session.

As for the BoC, BoJ, ECB, and the RBA, the Bank of Japan will likely be leading the doves for some time to come.

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