Central Bank Exit Strategies and Timing
We have seen the first moves by central banks, notably RBA, having raised rates twice, and Norway as well. Let’s look at some of the major banks, their guiding principles and possibilities for rate increases in the next 6 months, in order of increasing strength…
The BoJ has kept rates at 0.1% since December, and the market expects no rate changes through 2010. In fact, Prime Minister Yukio Hatoyama may want stronger monetary stimulus to buttress the economy’s “recovery”. His Finance Minister said there’s a “sense of crisis” over deflation and the Deputy Prime Minister urged the central bank to take action to overcome the price slump by stepping up purchases of JGBs (already at $20B/month). So not only no exit, but a potential stepping up of QE!
The Federal Reserve’s Bullard states emphatically that the Fed won’t be raising rates until 2012. The Fed has a dual mandate for growth and inflation targeting, and I believe it will remain accommodative for a long time to come. The market expects most other banks to be far faster in their rate increases, and is looking for the Fed to raise rates by only 125 bps for the one year forward.
The BoE is tasked with price stability. Given the growth for 2010 is forecast at 1.9%, the market is expecting BoE to be one of the first to tighten in 2010 according to futures. On the other hand, the OECD said the BoE should keep its rates low until 2011. In the latest BoE minutes, the board was split on increases vs more QE. Currently at 0.5%, maybe expect 1.25% in 2010
The ECB is showing some signs of impatience to unwind its emergency steps, recently announcing plans to tighten terms on which it lends liquidity to banks. Trichet sees further exit delays creating asset bubble risks and excess bank profits (bank source of funds at zero). The ECB is a strict inflation targeter, with rates currently at 1%. There will be some tightening by stealth (bringing market closer to target rates). The market is projecting 1.75% over one year.
The Norges Bank, the first in Europe to increase rates (by 0.25% to 1.5% last month), has a mandate of maintaining price growth (CPI) of close to 2.5%. However, inflation has exceeded the bank’s target in six of nine months this year, so they need to be even more aggressive! Yet as an exporter, they must remain fearful of a too-strong Krone. So I expect the Norges Bank to move deliberately (as they all do), and increase rates at every second meeting to 2.75 percent within 12 months.
Over in Oz, rates have gone from 3.0% to 3.25% and then 3.50%, the market is pricing in a rate hike to 5% in 2010. This makes sense from the expected growth rates (GDP +3.25% in 2010!), and the fact that the RBA is tasked with keeping the inflation rate between 1%-2%. However, the latest RBA minutes indicated a much less hawkish stance than expected, so maybe not all 150 bps will materialize in the next 6 months.
Paul Stafford contributes regularly to The Gestalt Shift and publishes an analysis report for trading the forex market based on fundamentals, the “Stafford Weekly Currency Briefing,” on 4xtradertools.com
