The Ghosts Of Central Banks Past And Future

Well, it’s just about over.

The greatest (or worst, depending on how you’re inclined to look at things) experiment in the history of monetary policy is about to be gradually wound down.

From the ECB taper to the Fed hike to the Riksbank’s “hawkish” QE extension (and yes, that’s an oxymoron of sorts), it appears as though the central banks of the world are going to attempt to stick the dismount. How successful they’ll ultimately be (especially considering inflation is anything but robust) remains an open question, but it sure will be interesting to watch them give it a shot.

As Deutsche Bank noted earlier this month, “the ratio of global QE purchases to net supply has just passed its peak of around 200%, meaning global QE purchases were double the size of net supply.” If we assume “Trump’s fiscal stimulus, amounting to about $530 billion per year for ten years, plus an ECB taper and a Fed portfolio rolloff plus Fed asset sales of $250 billion in 2018 and $500 billion in 2019,” the picture for 10s and for global QE looks like this:

So that’s 10s above 4.5% and global QE to supply turning negative.

As we prepare to usher out the era of QE and ultra accommodative policy (and again, I’m highly skeptical of this effort and of its chances of success), let’s take a look back at how this experiment in Keynesian wonderland progressed (the ghost of monetary policy past) and forward to how policy will likely evolve (the ghost of monetary policy future).

The past, via Goldman: 

The future, via Bloomberg:

Israel

• Next policy decision: Dec. 26

• Monetary policy: Bank of Israel left its benchmark interest rate at record low 0.1% on Nov. 28 for a 22nd month, citing accelerated inflation and “positive” economic picture; pause was expected by all economists surveyed by Bloomberg

• Bank has kept borrowing costs low out of worry about contributing to ILS strength; it reiterated guidance that policy will remain accommodative “for a considerable time”; minutes of November meeting show last rate decision was unanimous

Brazil

• Next decision: Jan. 11

• Monetary policy: BCB’s board cut Selic rate by a quarter-point for a second straight month on Nov. 30, to 13.75%, and described outlook as “especially uncertain”; reduction was expected by 46 of 53 analysts surveyed by Bloomberg; seven expected a half-point cut

• Deeper rate cuts could be on the way after a central- bank report showed that inflation will decelerate further, while economy fails to recover as quickly as expected

• BCB is likely to cut rate by as much as 50bps in January: analysts; easing inflation fueled bets that bank will triple pace of rate cuts in 2017

Canada

• Next policy decision: Jan. 18

• Monetary policy: BOC left benchmark rate on overnight loans between commercial banks at 0.5% on Dec. 7, said significant slack remains in economy; Governor Stephen Poloz signaled he’s in no rush to follow Fed’s rate increase, citing uncertain prospects for exports and business investment after U.S. election

• BOC will likely remain sidelined for foreseeable future, given inflation trending below target and expansionary fiscal policy on the way: Bloomberg Intelligence

Euro Area

• Next ECB monetary policy mtg: Jan. 19

• Monetary policy: In Dec. 8 decision, ECB expanded QE program to exceed EUR2.2t by end of 2017, buying at a reduced monthly pace with caveat that it can step up or prolong purchases if needed; by extending purchases and reducing the pace, ECB may be trying to preserve stimulus as political risks cloud outlook

• Main refinancing rate stayed at zero, deposit rate at minus 0.4%, and marginal rate at 0.25%, as predicted in Bloomberg survey

• ECB President Mario Draghi warned that region’s feeble inflation outlook means ECB stimulus won’t end any time soon; he warned European leaders at Dec. 15 meeting that rising global rates and explosive politics could expose euro area’s underlying weaknesses

Japan

• Next BOJ decision: Jan. 31

• Monetary policy: BOJ left monetary policy unchanged Dec. 20 and upgraded its economic assessment; central bank maintained its targets for short- and long-term rates and asset purchases as it seeks to control the nation’s yield curve; decision was expected by all economists surveyed by Bloomberg

• BOJ kept its rate on some bank reserves at minus 0.1%, reiterated its pledge to keep yield on 10Y Japanese govt bond at ~0%; Governor Haruhiko Kuroda said at a news conference that it’s too soon to discuss raising long- term yield target or specifics of raising rates

• Most economists surveyed said they don’t expect additional easing before Kuroda steps down in April 2018

U.S.

• Next FOMC decision: Feb. 1

• Monetary policy: FOMC raised rates for first time this year on Dec. 14, anticipated a steeper path for borrowing costs in 2017, said inflation expectations have increased “considerably,” signaled labor market is tightening; fed funds rate target range raised 25bps to 0.5%-0.75%; central bankers see three quarter-point hikes in 2017, up from two in September

• Some strategists and economists see potential for further shift higher in Fed’s 2017 rate forecast on possible effects of fiscal stimulus under Trump, while many are sticking with previously reported expectations

 

U.K.

• Next BOE policy decision: Feb. 2

• Monetary policy: BOE kept its key rate at 0.25% on Dec. 15, voted to keep two asset-purchase programs running as planned, and indicated that GBP’s recent appreciation may mean slower pickup in inflation next year

• At December meeting, policy makers foresaw any changes in near-term stance to just as likely be a tightening as an easing, committee member Ian McCafferty said in speech published on BOE’s website on Dec. 20

Russia

• Next policy mtg: Feb. 3

• Monetary policy: Bank of Russia left borrowing costs unchanged on Dec. 16 for a second meeting, opened way for rate cuts; one-week auction rate was held at 10%, in line with all but one of 35 forecasts in a Bloomberg survey

• Policy makers said easing may resume in 1H; Governor Elvira Nabiullina said at news conference that pace of any reductions will ensure that monetary policy remains “moderately tight,” with first decrease more likely in 2Q than 1Q

Australia

• Next RBA decision: Feb. 7

• Monetary policy: RBA left cash rate at 1.5% on Dec. 6 as global commodity upswing eased impact of a weaker economy at home; all 27 economists surveyed expected no change; Governor Philip Lowe has signaled further easing could destabilize an economy in which households are already saddled with record debt

• Minutes of December meeting show RBA balanced “considerable uncertainty” about labor market momentum with resurgent property prices in its decision

• Rate is seen staying at 1.5% in 2017, based on median forecast of views compiled by Bloomberg

India

• Next decision: Feb. 8

• Monetary policy: India’s central bank unexpectedly kept rates unchanged on Dec. 7, ahead of U.S. rate decision; benchmark rate stayed at 6.25%; move was predicted by only eight of 44 economists in a Bloomberg survey; 31 expected a cut to 6%, five saw a reduction to 5.75%

• Minutes of December meeting show central bank wanted to assess impact of govt’s cash clampdown and Fed’s widely expected rate increase

• Benchmark rate seen at 6% in 2017, based on median forecast of views compiled by Bloomberg

Mexico

• Next decision: Feb. 9

• Monetary policy: Banxico raised rates more than economists expected on Dec. 15, as policy makers looked to jolt MXN from near record lows, and said rate increases this year will help inflation return to target; overnight rate was lifted by half-point to 5.75%; only eight of 26 economists surveyed by Bloomberg expected a half-point increase; 17 saw a quarter-point hike; one expected rates on hold

• Banxico surprised traders and analysts by outpacing Fed’s quarter-point increase; Governor Agustin Carstens said Mexico won’t necessarily need to raise rates every time Fed does

New Zealand

• Next monetary policy statement: Feb. 9

• Monetary policy: RBNZ cut rates by a quarter-point to 1.75% on Nov. 10, said it’s probably done enough to return inflation to target as economic growth quickens; Governor Graeme Wheeler left door open to further action if needed, saying “numerous uncertainties remain”; all 17 economists surveyed by Bloomberg expected a rate cut

• Reiterating RBNZ’s view that official cash rate is likely to remain at 1.75% for some time, Wheeler said in speech posted on bank’s website in December that latest developments “do not cause us to change our view”

Sweden

• Next scheduled repo-rate announcement: Feb. 15

• Monetary policy: Riksbank extended its QE program into next year and held its repo rate at minus 0.5% in Dec. 21 announcement; it will buy an additional SEK15b each in both nominal and inflation-linked govt bonds, down from a total of SEK45b in the six months through the end of this year; all but one of the analysts surveyed by Bloomberg expected the move

• Growing internal divisions suggest Riksbank is nearing the end of its unprecedented monetary push to meet its inflation target; bank reiterated rates won’t rise until early 2018

Switzerland

• Next policy decision: March 16

• Monetary policy: Officials kept rates at minus 0.75% on Dec. 15 and warned of “multitude” of political risks facing global economy; pause was expected by all economists in Bloomberg survey; SNB reiterated pledge to intervene in currency markets if needed

• In contrast to Fed Chair Janet Yellen’s declaration of U.S. economic strength, Swiss officials’ tone was more ominous; SNB President Thomas Jordan said in interview with Bloomberg that it’s too early for policy normalization in Europe

Singapore

• Next scheduled policy announcement: April

• Monetary policy history: MAS signaled on Oct. 14 that it will stick to neutral currency policy for an extended time, after Singapore’s economy contracted the most in 4 years; said it will maintain a policy of zero-percent appreciation in the exchange rate, matching expectations of 21 of 24 economists surveyed by Bloomberg

• Volatility of economy, which is closely tied to global trade, may prompt policy makers to resume easing next year or turn to fiscal measures

Turkey

• Next policy decision: unannounced

• Monetary policy: Turkey’s central bank unexpectedly kept all three main rates unchanged on Dec. 20, a decision viewed by analysts as an attempt to support an economy that’s slowed sharply since July’s failed military coup; one-week repurchase, overnight lending rate, and borrowing rates were left at 8%, 8.5% and 7.25%, respectively; economists surveyed by Bloomberg expected a 25bp increase to overnight lending rate, no change to the other two

• Future decisions will be conditional on inflation outlook, cautious policy stance will be maintained, bank’s monetary policy committee said in a statement

China

• Next mtg: unscheduled

• Monetary policy history: PBOC cut 1-year lending rate to 4.35% from 4.6% in October 2015 to combat deflationary pressures and a slowing economy; it added additional support with a reserve ratio cut in February; required reserve ratio dropped by 0.5ppt, taking level to 17% for biggest banks

• Trump victory makes policy outlook more complex for PBOC Governor Zhou Xiaochuan

• China’s leaders are pledging a harder push to rein in risk next year and emphasizing prudent and neutral monetary policy; PBOC is also taking steps to lure more foreign investors to its bond market

Denmark

• Next policy decision: unscheduled

• Monetary policy history: Central bank left its benchmark rate unchanged on March 10; deposit rate was kept at minus 0.65%, as expected by 5 of 6 economists; rate has been mostly negative since mid-2012

• Denmark is probably offloading DKK in its first currency interventions since June as central bank gets dragged back into an active fight to defend its euro peg; bank is due to announce currency market operations on Jan. 3

• Governor Lars Rohde said in Dec. 7 interview with Bloomberg that view in Europe remains that rates will stay where they are “for a very long time”

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In the true spirit of Christmas, I thought I’d close with the following clip from the classic retelling of A Christmas Carol starring Bill Murray. While this was funny at the time the film was released, what’s disturbing is that it now looks a lot like reality…