The Fed – Easing to Come
While the Fed cut rates at its last meeting, Fed chair Powell was quick to downplay the likelihood of further easing. Instead, he maintained that the move was a “mid-cycle adjustment” rather than the start of a lengthy easing process.
However, given the downturn in global conditions since then, largely fuelled by the escalating trade war, the market is now expecting the Fed to ease further. The US and China have both applied a fresh set of 15% tariffs to each other’s goods. This is likely to weigh on further on global growth, creating more of a need for easing. While the Fed is not forecast to ease at the upcoming meeting in September, the market will be looking for a signal that easing is, indeed, coming in October.
The ECB – Immediate Easing
In line with the minutes of the last ECB meeting, the forex market is widely expecting the bank to ease at the upcoming September meeting. The minutes showed that the majority of policymakers now favor a package of measures over a single action.
The industry is now aligning around a combination of deposit rate cuts, a tiered system, the restarting of QE and repricing of TLTRO’s. Given the stagnant state of inflation in the eurozone as well as still anemic growth, it seems unlikely that the ECB will under-deliver this time. Especially with Draghi’s term shortly coming to an end.
The BOE – On Hold or Now
The BOE has had an incredibly frustrating year. A vast range of domestic indicators has continued to highlight growth over the year, namely inflation, GDP and labor market conditions. However, the dark cloud of Brexit has bound the bank’s hands.
The BOE continues to cite the need to establish a clear outcome to Brexit before making any decisions on rates. The bank has highlighted the two-way risk around Brexit, saying that dependent on the outcome, a rate hike could be just as likely as a rate cut. For now, the waiting game continues.
The BOJ – Further Easing to Come
Surprisingly, the BOJ has yet to move on rates during this latest wave of central bank easing. However, given the complex nature of the economic situation in Japan, where a decade of massive easing has had little positive impact, perhaps the wait-and-see approach is not so surprising.
Despite remaining on hold until now, the BOJ has signaled the likely need for further easing in light of the ongoing downturn in global conditions. With the trade war between the US and China escalating again, there is a growing likelihood that this fresh easing will be announced in September rather than later in the year.
The BOC – Cautious Optimism
Amidst the sea of dire conditions and generally dovish forecasts sweeping across the G10 central bank space, the BOC has bucked the trend. Against a backdrop of solid growth in Canada (2Q GDP 3.7% annualized), the BOC has held rates firm and has not (yet) given in to dovish signaling.
However, with the trade war between the US and China showing no signs of ending, and with oil prices below the bearish trend lines from the year, there is a growing risk that growth will start to recede in Canada. For now, though, the outlook remains cautiously optimistic.
The RBA – Further Easing to Come
The RBA has eased twice this year and despite having paused over August, there are growing expectations that the bank will return to easing at the upcoming meeting in September. Weaker global conditions, including softer commodity prices, have been weighing on AUD sentiment.
With the trade war between the US and China still raging and threatening to escalate further still, the outlook remains negative and the RBA will want to keep a close tab on the economy. This is especially true following the upward boost experienced by the RBA in reaction the larger than expected RBNZ rate cut in August.