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CENTRAL BANK MONITORING – DECEMBER 6 Monetary Department

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CENTRAL BANK MONITORING – DECEMBER 6 Monetary Department CENTRAL BANK MONITORING – DECEMBER 6 Monetary Department Monetary Policy and Fiscal Analyses Division 1 0 2 2 In this issue Most of the central banks under review are maintaining their interest rates at the current low level or considering a further monetary policy easing. For example, Norges Bank is considering lowering its key rate and the Riksbank increasing the volume of purchased bonds. The Reserve Bank of New Zealand has lowered the key rate further. The ECB left interest rates unchanged in the previous period but extended its bond purchase programme and adjusted its parameters. On the other hand, the global economy is watching anxiously whether the Fed’s interest rates increase as expected at the close of this year. Spotlight addresses the effect of climate change on the financial sector, including central bank policies. In our Selected speech, member of the Executive Board of the Deutsche Bundesbank Andreas Dombret focuses on the perspectives of business models of commercial banks. Czech National Bank / Central Bank Monitoring LATEST DEVELOPMENTS 3 1. LATEST MONETARY POLICY DEVELOPMENTS AT SELECTED CENTRAL BANKS Key central banks of the Euro-Atlantic area Euro area (ECB) USA (Fed) United Kingdom (BoE) Inflation target <2%1 2%2 2% MP meetings 20 Oct (0.00) 20–21 Sep (0.00) 15 Sep (0.00) (rate changes) 8 Dec (0.00) 1–2 Nov (0.00) 3 Nov (0.00) Current basic rate 0.00%; -0.40%3 0.25–0.50% 0.25% Latest inflation 0.6% (Nov 2016)4 1.6% (Oct 2016) 0.9% (Oct 2016) 19 Jan 13–14 Dec 15 Dec Expected MP meetings 9 Mar 31 Jan – 1 Feb 2 Feb 18 Jan: publication of Beige 9 Mar 2 Feb: publication of Other expected events Book, Feb: Monetary Policy publication of forecast Inflation Report Report Expected rate movements6 → ↑ → 1 ECB definition of price stability “below but close to 2%”; 2 January 2012 definition of inflation target; 3 deposit rate; 4 flash estimate; 5 the meeting includes a summary of FOMC economic forecasts and a press conference by the FOMC Chairman; 6 direction of expected change in rates in coming quarter taken from Consensus Forecast survey. The ECB did not change its key interest rates; it extended the asset purchase programme (APP) in line with prevailing expectations, at least until the end of 2017, but at the same time announced surprisingly that it would reduce their monthly volume by EUR 20 billion from April 2017 (i.e. from the current EUR 80 billion to EUR 60 billion). It also adjusted certain details of the purchases (see News). The ECB also confirmed that it expects interest rates to remain at the current low level or lower levels after the asset purchases end. The current ECB forecast remains broadly the same as in September. The ECB expects GDP to grow by 1.7% in 2016 and 2017 and by 1.6% in 2018. Inflation will remain very low in 2016 (0.2%) and increase to 1.3% and 1.5% in 2017 and 2018 respectively. The Fed left interest rates unchanged in the range of 0.25–0.50% in November. Markets expect an increase in rates before the end of 2016 practically with certainty. Three of the ten FOMC members advocated an interest rate increase of 0.25 pp at the November meeting. According to the FOMC, inflation will remain low. The Fed expects the 2% target to be hit in the medium term. The GDP growth estimate for Q3 was 3.2% as against expectations of 2.9%, which is the best result in two years, driven mainly by exports. The BoE left its key interest rate at 0.25%. It has purchased bonds totalling GBP 10 billion since August 2016; this programme should take 18 months. It also purchases government bonds in series; aggregate holdings of government securities will thus amount to GBP 435 billion. Inflation increased slightly, to 0.9% in October. The BoE expects it to rise further, to around 2.7% in 2018. It will largely be affected by the recent depreciation of the pound and the subsequent growth in import prices. At 2.3%, the published figure for GDP growth in Q3 exceeded the BoE’s expectations, due mainly to growth in the services sector. Czech National Bank / Central Bank Monitoring LATEST DEVELOPMENTS 4 Selected central banks of inflation-targeting EU countries Sweden (Riksbank) Hungary (MNB) Poland (NBP) Inflation target 2% 3% 2.5% MP meetings 20 Sep (0.00) 4–5 Oct (0.00) 26 Oct (0.00) 25 Oct (0.00) 8–9 Nov (0.00) (rate changes) 22 Nov (0.00) 6–7 Dec (0.00) Current basic rate -0.50 %; -1.25%2 0.9 %; -0.05%2 1.50% Latest inflation 1.2% (Oct 2016) 1.0% (Oct 2016) 0% (November 2016) 20 Dec 10–11 Jan 20 Dec Expected MP meetings 24 Jan 7–8 Feb 14 Feb 28 Feb 7–8 Mar 15 Feb: publication of 28 Mar: publication of 13 Mar: publication of Other expected events Monetary Policy Report Inflation Report Inflation Report Expected rate movements1 → → → 1 Direction of expected change in rates in coming quarter taken from Consensus Forecast survey; 2 deposit rate. The Riksbank left its key interest rate at -0.5% in October and moved closer to reaching the total planned volume of bond purchases amounting to SEK 245 billion in 2016. A decision to increase the volume of purchased bonds and an extension of the programme can be expected in December. The Riksbank does not rule out a further lowering of the repo rate and, compared to the September forecast, it expects to maintain it at a low level six months longer, i.e. it places the first expected rise in the rate to late 2017 and early 2018. The main motivation for continued expansionary monetary policy is to reduce the risk of interrupting the current upward trend in inflation. The Riksbank lowered the inflation outlook only marginally for 2016 (to 1% and 1.4% for CPI and CPIF respectively), but more significantly for 2017 (to 1.4% and 1.6% for CPI and CPIF respectively). The MNB left its key interest rate unchanged at 0.9%. The deposit rate remains at -0.05%. However, it narrowed the rate corridor, as it lowered twice the upper boundary of the interest rate band in the form of the overnight lending rate on secured loans to banks. It lowered this rate cumulatively by 0.25 pp to 0.90%, fostering a further easing of the monetary conditions. The economy in Hungary grew at 2% year on year in Q3, fast growth continued in retail trade and household consumption is expected to pick up. This is affected favourably by the labour market, where employment keeps growing and unemployment is declining. Since October, the MNB has limited the volume of money which commercial banks may deposit with it to HUF 900 billion, which, according to the MNB, means crowding out at least 200–400 billion of liquidity from the deposit facility. The MNB is also ready to apply unconventional or precisely targeted monetary policy instruments. The NBP left its interest rate at 1.5%, where it has kept it for almost two years. Economic growth slowed to 2.5% year on year in Q3, mainly as a result of a decline in investment due to a lower drawdown of EU funds and also due to lower exports. The NBP expects household consumption and investment to grow faster next year. The decrease in consumer prices halted in November. However, the return to the inflation target will be rather gradual. Czech National Bank / Central Bank Monitoring LATEST DEVELOPMENTS 5 Other selected inflation-targeting countries Norway (NB) Switzerland (SNB) New Zealand (RBNZ) Canada (BoC) Inflation target 2.5% 0-2% 2% 2% MP meetings 22 Sep (0.00) 22 Sep (0.00) 19 Oct (0.00) 15 Sep (0.00) (rate changes) 27 Oct (0.00) 10 Nov (-0.25) 7 Dec (0.00) 0.50% from -1.25 to -0.25%2; Current basic rate 1.75% 0.5% -0.50 reserve rate1 -0.75%3 Latest inflation 3.7% (Oct 2016) -0.2% (Oct 2016) 0.4% (2016 Q3) 1.5% (Oct 2016) 15 Dec 15 Dec 9 Feb 18 Jan Expected MP meetings 16 Mar 16 Mar 23 Mar 1 Mar 15 Dec: 15 Dec: 9 Feb: publication of 18 Jan: publication of Other expected events publication of Monetary publication of Monetary Monetary Policy Monetary Policy Report Policy Report Policy Report Statement Expected rate ↓ → → → movements4 1 only on reserves exceeding the quota; 2 chart displays centre of band; 3 negative deposit rate used to remunerate bank’s balances with the SNB in a graded manner by volume; 4 direction of expected change in rates in coming quarter taken from Consensus Forecast survey or, in the case of New Zealand, from RBNZ survey. The NB kept its interest rate unchanged at 0.50% at its previous meetings. Governor Olsen even mentioned its possible further decline at the September meeting (the forecast expects it to decline to 0.25% by the end of the year). Weaker growth prospects persist for the Norwegian economy, despite an increasing price of oil and the resulting benefits for the economy. Inflation stood at 3.7% in October. Property prices recorded an annual increase of 10%, with large cities showing even faster price growth. The countercyclical capital buffer rate remains unchanged at 1.5%. The SNB left the interval for its monetary policy interest rate (3M LIBOR) at -1.25% – -0.25% at the June meeting; the rate used to remunerate banks’ balances with the SNB was also unchanged at -0.75%.
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