Cen­tral banks take cen­tre stage amid slow growth

The Pak Banker - - COMPANIES/BOSS -

Cen­tral banks take cen­tre stage in the com­ing week as pol­i­cy­mak­ers from Wash­ing­ton to Lon­don and Tokyo bat­tle slow­ing global growth, height­ened mar­ket volatil­ity and de­fla­tion­ary pres­sures. Com­ing af­ter the Euro­pean Cen­tral Bank's mas­sive stim­u­lus pack­age, the US Fed­eral Re­serve must re­solve con­flict­ing eco­nomic driv­ers while the Bank of Eng­land will take a cau­tious line ahead of a defin­ing vote on Euro­pean Union mem­ber­ship.

A stand­out in an oth­er­wise wob­bly world econ­omy, even the United States is fac­ing grow­ing head­winds, pri­mar­ily from trade and weak emerg­ing mar­kets.

That is likely to stay the Fed's hand on Wed­nes­day and push out its next hike, pos­si­bly to June, even as it main­tains a tight­en­ing bias.

"Over­all, the mes­sage from the Fed will likely be a pause to as­sess un­cer­tain­ties and gather more ev­i­dence, but no shift in strat­egy, or medium term view: act soft, talk tough," BNP Paribas said in a note.

While the Fed has hinted at four 25ba­sis-point rate hikes this year, mar­kets see just one in­crease in the se­cond half, leav­ing an un­usu­ally big gap be­tween mar­ket ex­pec­ta­tions and the cen­tral bank's guid­ance.

Fu­elling the doves' case, the Cleve­land Fed's Fi­nan­cial Stress In­di­ca­tor briefly showed its high­est warn­ing level in re­cent weeks, point­ing to sig­nif­i­cant risk. Busi­ness sur­veys have also pointed to grow­ing wor­ries while ex­ports are fac­ing chal­lenges from a strong dol­lar.

But un­em­ploy­ment con­tin­ues to fall, hous­ing ac­tiv­ity is high, the labour mar­ket is tight­en­ing and house­hold con­sump­tion is ris­ing, all in­di­cat­ing that the real econ­omy is per­form­ing broadly as the Fed has pre­dicted. Data also sug­gest that the labour sup­ply will be below de­mand, sug­gest­ing in­creased com­pe­ti­tion for labour and higher wages, a strong ar­gu­ment to keep in­creas­ing rates, econ­o­mists said.

"The dif­fer­ence be­tween a hawk­ish Fed and a dovish Fed is the de­gree to which they open the door to a June, or much less likely, April hike," Citi econ­o­mist Steven Eng­lan­der said.

"They have no in­cen­tive to pre­an­nounce a June hike," Eng­lan­der said. "It makes more sense for them to be­gin warn­ing the mar­ket a month or so be­fore they in­tend to hike so that it is largely priced in be­fore it oc­curs and has less chance of be­ing de­railed by events that they can't con­trol."

The Bank of Eng­land, an­nounc­ing its de­ci­sion on Thurs­day, a day af­ter the new bud­get is de­liv­ered, is also sure to stay on hold, po­ten­tially sound­ing a dovish tone and ac­knowl­edg­ing po­ten­tial eco­nomic hur­dles. The meet­ing's min­utes, pub­lished along with the de­ci­sion, are likely to show a unan­i­mous vote for flat rates for se­cond month in a row af­ter lone dis­senter call­ing for a hike re­joined the fold last month.

Al­though some pol­i­cy­mak­ers have flirted with the thought of stim­u­lus, data on Wed­nes­day is ex­pected to show wage growth pick­ing up speed af­ter slow­ing in re­cent months, damp­en­ing any rate-cut talk. "While the re­cent quite sharp fall in trade-weighted ster­ling and the large per­cent­age rise in oil prices will push up on in­fla­tion, with growth slow­ing, wage growth weak, and un­cer­tainty high, in large part due to the im­pend­ing ref­er­en­dum on EU mem­ber­ship, the MPC will be in no mood to talk up the prospect of rate hikes," Uni­Credit said.

The Bank of Ja­pan is also likely to stay on hold, still scram­bling to soothe mar­ket jit­ters caused by Jan­uary's sur­prise de­ci­sion to adopt neg­a­tive in­ter­est rates.

Mar­kets are rife with spec­u­la­tion the BoJ will ex­pand mon­e­tary stim­u­lus in the com­ing months to re­flate a stag­nant econ­omy af­ter Jan­uary's move failed to boost stock prices or ar­rest an un­wel­come rise in the yen. But many cen­tral bank pol­i­cy­mak­ers are re­luc­tant to ease again soon un­less ex­ter­nal shocks jolt global fi­nan­cial mar­kets enough to de­rail Ja­pan's frag­ile eco­nomic re­cov­ery, sources fa­mil­iar with the bank's think­ing told Reuters ear­lier.

Com­ments from BOJ Gov­er­nor Haruhiko Kuroda that it is time to scru­ti­nise the ef­fects of neg­a­tive rates also point to a steady hand.

The Swiss Na­tional Bank is like­wise ex­pected to stay pat on Thurs­day while min­utes from the Re­serve Bank of Aus­tralia are likely to ac­knowl­edge a sur­pris­ing im­prove­ment in the out­look af­ter re­cent GDP data beat ex­pec­ta­tions by a wide mar­gin.

"Un­less there is a se­ri­ous de­te­ri­o­ra­tion in the lo­cal growth out­look gen­er­ally, and par­tic­u­larly the labour mar­ket, and/or a melt­down in the global growth out­look, say a tank­ing in Chi­nese growth, then the RBA will be con­tent to leave the cash rate at 2 per­cent over 2016," Com­mon­wealth Bank said.

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