Friday, 23 Oct 2020

World's central banks confront reality of Fed's three-year plan

More than a dozen central banks will this week confront a new reality where monetary policy in the world’s biggest economy is set to stay ultra-loose for the foreseeable future.

With the Federal Reserve’s recent signal that United States interest rates should be kept low for at least three years, officials meeting from Sweden to New Zealand have one more assumption on which to base their decision-making, beyond the knowledge that the coronavirus remains untamed.

That guidance from the Fed incorporates a reimagined policy framework to allow inflation to overshoot after periods of underperformance, a stance that already startled the global monetary authorities by weakening the dollar when it was unveiled last month.

While a cheaper US currency, entrenched by low rates, could affect the inflation outlooks of other central banks, few are likely to respond with immediate loosening themselves.

Of the 16 or so decisions scheduled for the next few days, most should show policy on hold at an already easy setting. Colombia and Mexico, both proximate to the US, may still cut their benchmarks.

US AND CANADA

Fed chairman Jerome Powell testifies before congressional committees for three straight days – tomorrow, Wednesday and Thursday – to discuss the response to the coronavirus pandemic.

He will likely face questions about the broader state of the economy and fiscal stimulus.

Weekly data on Thursday will showcase the level of continuing unemployment benefit claims for the week ended Sept 12, a key metric in economists’ estimates for the monthly jobs report that is due on Oct 2.

August home sales and durable-goods orders are also coming out.

EUROPE, MIDDLE EAST, AFRICA

Bank of England (BOE) governor Andrew Bailey will have a chance to clarify the BOE’s surprising comments on preparations for negative rates when he speaks tomorrow.

That same day, British data will shed more light on the damage that the fallout from the pandemic has done to public finances.

Surveys in Britain and the euro area later in the week will give investors insight into whether the rebound from the pandemic has peaked, with a surge in new infections now threatening to put that recovery in jeopardy.

Switzerland’s central bank is set to keep its rate at minus 0.75 per cent, while Norway and Sweden are forecast to stick with zero per cent, and Czech policymakers will probably stay at 0.25 per cent.

In Hungary, policymakers will decide on rates too, with inflation hovering around the top of their tolerance band and the forint near a record low.

Turkey holds its rate-setting meeting on Thursday after the lira hit consecutive record lows in past weeks. The monetary authority has so far resorted to backdoor tightening to avoid an outright rate hike, a move that President Recep Tayyip Erdogan has said he would oppose.

Nigeria will probably hold the key rate with inflation stuck above the target band of 6 per cent to 9 per cent since 2015 and showing no sign of easing.

Egypt, one of the few economies in the region expected to expand this year, may also maintain policy as the authorities seek to entice foreign investors with a relatively high yield.

ASIA

China sets its loan prime rate today, with no change expected.

On Wednesday, the Reserve Bank of New Zealand’s policy meeting will be scrutinised for any signs that it is closer to adopting negative rates.

Thailand’s central bank also meets on Wednesday.

On the data front, South Korean trade data for the first 20 days of this month will be closely watched to see whether a recovery in global commerce continues.

LATIN AMERICA

Brazil’s central bank posts tomorrow the minutes of last week’s meeting, which will offer a closer look at the decision to hold at a record-low 2 per cent.

Two days later, the bank publishes its quarterly inflation report updating critical economic forecasts and forward guidance.

Later on Thursday, Mexico may opt to ease for a record 11th straight meeting to put the key rate at 4.25 per cent, even with inflation just above the top of the bank’s target range.

On Friday, Colombia may extend a six-month easing cycle and lower borrowing costs to a record-low 1.75 per cent.

On the data front, Argentina is the last of the region’s big economies to report second-quarter output, with the year-on-year figure expected to come in near Mexico’s minus 18.9 per cent.

BLOOMBERG

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