ECB Trends Dovish, BOC Likely To Hold Rates | Weekly Review And Preview

  • Monday, May 23, 2016

Welcome to Prattle’s “Weekly Review and Preview.” Each week, we analyze the most important communications from the previous week and give our thoughts on upcoming releases.

  • Review

European Central Bank
In brief: Trending dovish
Analysis: The ECB displayed new dovish language last week, with Coeure discussing the feasibility of further rate cuts and the minutes of their policy meeting revealing concerns over weak inflation expectations. With a slightly negative residual score of -0.18, the minutes were unusually dovish.

ECBMay23

Federal Reserve
In brief: Likely to raise rates in June
Analysis: Last week’s Fed minutes, with a positive residual score of 0.31, boosted expectations of a June rate hike. NY Fed President Dudley supported this view by indicating (as several of his colleagues have recently done) that the markets are not pricing in enough rate hikes in 2016.

Bank of England
In brief: Waiting on Brexit vote
Analysis: Facing uncertainty over the Brexit vote, BOE policymaker Gertjan Vlieghe gave a dovish speech (residual score -0.3) in favor of a rate cut after the Brexit vote if inflation does not rise over the coming weeks.

Swedish Riksbank
In brief: Reevaluating policy decisions
Analysis: As the ECB may be reconsidering further negative rates, some in Sweden are signalling that their supposed success with negative rates may not be so successful after all. Skingley roundly critiqued the policy last week, declaring it not as effective as previously thought.

Norges Bank
In brief: Trending dovish
Analysis: In line with the rest of the European region, Oystein Olsen from the Norges bank is also signalling dovish. Although he defended the lack of a May rate cut in a speech last week, he was quick to point out that Norway could go negative if external events (ie. lower oil prices) shock the Norwegian economy.

Reserve Bank of Australia
In brief: Minutes gave rate cut rationale
Analysis: The minutes from RBA’s recent monetary policy meeting revealed internal strife about whether or not it was the right time to cut rates. Interestingly, the argument made clear that all were in favor of a rate cut, but some saw the timing as premature. These minutes scored very dovish with a residual of -1.5.

  • Preview

Bank of Canada
Forecast: Likely to hold rates
Analysis: Over the last month we have seen sentiment from the Bank of Canada drop from trending over 1 to roughly 0.7. In this period of time, the Canadian economy appears to have slowed due to oil production disruptions caused by wildfires in western Canada. Given this drop in sentiment recently (despite oil prices rising), we expect policymakers to hold rates and issue dovish language vowing to protect the recovery that had been going smoothly until the last few weeks.

BOCMay23

European Central Bank
Forecast: Speakers to signal future policy decisions
Analysis: With several speakers this week, including Draghi, we expect the ECB to make headlines based on its indication whether or not it is willing to push rates further negative or engage in some other form of stimulus.

Federal Reserve
Forecast: Speakers to emphasize lack of accurate marketing pricing
Analysis: Conversely, we expect Harker, Bullard and Powell to reiterate the increasingly familiar Fed policymaker mantra that the market is not pricing in enough rate hikes this year. The only questions are the number of hikes discussed (two or three) and if they’re targeting June.

Bank of England
Forecast: Not likely to take firm policy position
Analysis: BOE speakers this week are likely to again push on uncertainty around Brexit, but are unlikely to commit to imminent policy change.

Swedish Riksbank
Forecast: Likely to signal future policy decisions
Analysis: Riksbank speakers this week could provide a valuable signal about the bank’s new policy direction after declaring negative rates less successful than initially thought.

Bank of Turkey
Forecast: Likely to cut rates
Analysis: Despite a rebound in sentiment recently, we still see it as highly likely that the central bank of Turkey cuts rates by another 50bps this week. These rate cuts will be necessary to bolster the economy during political and economic unrest. The only question is how aggressive the new leadership will be, and, given the 50bps move last meeting, that is exactly what we expect this time as well.

The Prattle Team

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