29.07 Weekly Viewpoint : Fed, BoJ and ECB: see you in September!

The Fed has left the door open for a hike in the coming months. If the data maintain the positive pace of the last month, the Committee could act as early as September, but preparatory work is needed as the market remains skeptical on a rate hike in 2016…………


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The BoJ announced a disappointing package this week but left the door open to further increases in monetary stimulus, perhaps as early as September.

In the euro area, latest data on growth and inflation do not indicate an urgent need to increase the monetary stimulus. ECB‘s actions in September remain conditional on new information.

The Fed reopened the door for a rate increase in the near future, given a more optimistic assessment of the macro outlook. The FOMC members believe that “the short-term risks to the economic outlook have declined”. However, the Committee did not provide an explicit guidance on the possible timing and kept all options and conditions open. Once more, the evolution of data and global risks will shape the interest rates path. On the data front, a rather solid series of positive information and some upward surprise accumulated in the past month. If the trend is confirmed, the Committee could move already in September, but it will need some preparatory work as the market remains skeptical on the prospects of a move in 2016. The minutes of the July meeting (due out in 3 weeks) and Yellen speech in Jackson Hole in late August will be key to assess the likelihood of a rate hike in September. Decisions on the timing and size of the future interval for the Fed funds interest rate will depend on the assessment of “actual and perspective economic conditions”, based on the evolution of labor market conditions and inflationary pressures, and in particular on the progress of inflation towards the 2% target. The Committee continues to believe that “economic conditions will evolve in a manner that justifies only very gradual increases in the federal funds target”, while the actual rates should remain “for some time” below long term rates.

The BoJ disappointed expectations of a sizeable increase in monetary stimulus at the July meeting and only delivered: 1) an increase of the ETFs purchase program to 6 tln yen per year (from 3.3 tln with a non-unanimous vote of 7-2), and 2) an in increase measures to facilitate foreign currency funding. The other dimensions of the monetary policy strategy remain unchanged, both in terms of JGB purchases (+80 tln yen per year, with 8-1 vote) and in terms of the policy rate level (-0.1% with a 7-2 vote). The outlook for growth and inflation was revised down modestly, but inflation is still expected at 1.9% in 2018. The statement emphasizes the great uncertainty for the scenario and leaves the door open to an increase in the monetary stimulus already in September. The BoJ Governor requested staff to carry out preparatory work to assess the measures already in place and for further discussion and possibly new decisions at the next meeting. The assessment of monetary policies already in place is justified by several members’ skepticism but it could also be a prelude to a more “revolutionary” monetary policy approach in coordination with the fiscal policy strategy. The government will announce a fiscal stimulus program around 28 tln yen within the next week. The BoJ could perhaps be considering moving to helicopter money?

In the euro area, latest data confirmed a slowdown in GDP growth to 0.3% q/q in the Spring after the 0.6% q/q recorded at year-start and partly inflated by exceptional calendar and weather effects. July business surveys (IFO, PMI, ISTAT and the EU Commission ESI) have remained at levels consistent with euro area GDP growth in the 0.3%/0.4% q/q in the summer and did not indicate a significant impact on morale of the British vote so far. Meanwhile, euro area inflation has surprised on the upside on pressures from domestic prices. If the ECB were to decide today it is likely that would opt to extend the wait and see mode. The announcement of fresh stimulus in September remains conditional on the evolution of data and financial conditions in the next month. For now there is no sense of urgency.


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