Bank of England Monetary Policy Decision

Business affected by uncertainties

“Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity…. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.”

Rates raised, QE continues

“…the MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.”

Fed Governor Lael Brainard at the NBER ’s Monetary Economics Summer Institute

Normalization underway

“In the United States, in my assessment, normalization of the federal funds rate is now well under way, and the Federal Reserve is advancing plans to allow the balance sheet to run off at a gradual and predictable pace. And for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.”

 

The FOMC delayed balance sheet normalization for a reason

“the Federal Open Market Committee (FOMC) decided to delay balance sheet normalization until the federal funds rate had reached a high enough level to enable it to be cut materially if economic conditions deteriorate, thus guarding against the risk of returning to the effective lower bound (ELB) in an environment with a historically low neutral interest rate. The greater familiarity and past experience with the federal funds rate also weighed in favor of this instrument initially. Separately, for those central banks that, unlike the Federal Reserve, moved to negative interest rates, there may be special considerations associated with raising policy rates back into positive territory.”

He expects balance sheet normalization to start soon 

“If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate relatively soon to commence the gradual and predictable process of allowing the balance sheet to run off.”

He thinks the neutral real fed funds rates will remain close to zero

“In my view, the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term. If that is the case, we would not have much more additional work to do on moving to a neutral stance… in recent days, we have begun to hear acknowledgement from other major central banks that they too are seeing conditions that suggest policy normalization could be on the table before too long, against the backdrop of a brighter global outlook…the pace and timing of how central banks around the world proceed with normalization, and the importance of balance sheet policy relative to changes in short term rates in these normalization plans, could have important implications for exchange rates and financial conditions globally.”

 

https://www.federalreserve.gov/newsevents/speech/brainard20170713a.htm

European Central Bank Forum Speeches

Mario Draghi, President of the ECB

Muted inflation expectations

“We see growth above trend and well distributed across the euro area, but inflation dynamics remain more muted than one would expect on the basis of output gap estimates and historical patterns.”

Challenges to reflation

“monetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation. The past period of low inflation is also perpetuating these dynamics”

Monetary accomodation still needed

“While there are still factors that are weighing on the path of inflation, at present they are mainly temporary factors that typically the central bank can look through. However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining.”

 

Mark Carney, Governor of the Bank of England

Firming global growth

“The Bank of England estimates that more than 80% of the world economy is now growing above potential. Global measures of industrial production and capital goods orders, as well as world trade, have strengthened markedly over the past year…With that more favourable outlook, investment intentions are now rising around the world”

Easing on the horizon

“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”

 

http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech986.pdf

https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170627.en.html

 

Stephen Poloz, Bank of Canada Governor on CNBC

On the initiatives by the US government

“Well we’ve given up modelling specific initiatives because it’s taking some time to come into focus and we think whenever something concrete is tabled we’ll have then time to do the modelling and understand it. I think at the company level people have just been weighing this extra layer of uncertainty about the future…those uncertainties are holding back investment decisions even though investment is picking up. It’s picking up less than it would without that uncertainty. So it’s a bit of a headwind.”

Speech by Fed Vice Chairman Stanley Fischer

Appreciating asset prices increase the appetite for risk and leverage

“…elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. When asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage”

Banks have high regulatory capital

“Regulatory capital at large banks is now at multidecade highs. The largest banks have already met their fully phased-in capital requirements, including the conservation buffer and the capital surcharge for the global systemically important banks….Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.”

On debt levels

“In the private nonfinancial sector, which includes corporations and households, total debt remains well below its long-run trend, largely driven by subdued borrowing among households. However, the corporate business sector appears to be notably leveraged, with the current aggregate corporate-sector leverage standing near 20-year highs.”

Auto and Student loans are a spot of bother

“Auto loan balances and delinquency rates are high for borrowers with lower credit scores, meaning that the riskiest borrowers are borrowing more and not paying it back as often….Student loan balances keep rising, and delinquency rates on those loans are near historical highs”

We dare not be complacent on risk

“There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks.”

 

https://www.federalreserve.gov/newsevents/speech/fischer20170627a.htm

FOMC statement on monetary Policy 14th June 2017

Generally:

“…the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid..the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand.”

On inflation

“On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

Rates forecasted to remain low

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Balance sheet normalization to start this year

“The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program…would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities”

ECB President Q & A June 8th 2017

ECB President Mario Draghi

The ECB has not discussed normalization

“You asked me about normalisation: was it being discussed? The answer is no.”

Rates not expected to go lower

“if you ask me now, “What do you expect?” I would say that based on a current assessment, current information, I don’t expect lower interest rates. If you ask me, “But in case things were to worsen, are you ready to lower interest rates?” the answer is yes.”

On inflation

“nothing has substantially changed as far as inflation is concerned. There is going to be also in the coming months, by the way, a significant amount of volatility due to oil prices and food prices, but the underlying inflation is basically staying what it is today. So what we see now, based on the current information, is a path of low inflation, underlying inflation, and flat across time…the risk of deflation has dissipated.”

ECB Press Conference 8th June 2017

Mario Draghi – President of the ECB

Don´t expect rates to go lower

“we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.”

A stronger growth momentum

“The information that has become available since our last monetary policy meeting in late April confirms a stronger momentum in the euro area economy, which is projected to expand at a somewhat faster pace than previously expected….Incoming data, notably survey results, continue to point to solid, broad-based growth in the period ahead. ”

Inflation has not picked up

“the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued…. At the same time, measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation. Underlying inflation is expected to rise only gradually over the medium term….the risk of deflation has dissipated”

GDP growth revised upwards

“These projections foresee annual real GDP increasing by 1.9% in 2017, by 1.8% in 2018 and by 1.7% in 2019. Compared with the March 2017 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised upwards over the projection horizon.”

ECB President Mario Draghi in Brussels

Increasingly Solid economic growth

The economic upswing is becoming increasingly solid and continues to broaden across sectors and countries. Real GDP in the euro area has expanded for 16 consecutive quarters, growing by 1.7% year-on-year during the first quarter of 2017. Unemployment has fallen to its lowest level since 2009. Consumer and business sentiment has risen to a six-year high, supporting expectations of a further strengthening of growth in the coming months.”

Inflation is subdued

“Despite a firmer recovery, and looking through the volatile readings in HICP inflation over recent months, underlying inflation pressures have remained subdued. Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.”

Monetary accomodation set to continue

“For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation.”

 

https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170529.en.html

Federal Open Market Committee Member Quotes

U.S. Federal Reserve Governor Lael Brainard at the New York Association for Business Economics

Risks not flashing red

“Eight years into the recovery, it is important to recognize that financial conditions can change rapidly and bear special vigilance. Nonetheless, risks to the U.S. financial system do not appear to be flashing red in the way they did in the run-up to previous downturns….In recent quarters, the balance of risks has become more favorable, the global outlook has brightened, and financial conditions have eased on net.”

Economic improvement expected to continue

“On balance, when assessing economic activity and its likely evolution, it would be reasonable to conclude that further removal of accommodation will likely be appropriate soon…There are good reasons to believe that the improvement in real economic activity will continue.”

Balance Sheet normalization approaching

“The time for a change in balance sheet policy is coming into clearer view as normalization of the federal funds rate approaches the range that can be considered “well under way”….balance sheet normalization should be associated with higher term premiums, which in turn, other things held equal, should be associated with higher long-term Treasury yields. ”

 

John C. Williams, President and CEO, Fed Reserve Bank of San Francisco on CNBC and at the Symposium on Asian Banking and Finance


A fully recovered US economy

“The U.S. economy has fully recovered from the global financial crisis and the ensuing recession. In fact, the U.S. economy is about as close to the Fed’s dual mandate goals as we’ve ever been.”

Fiscal Policy Unclear

“There’s a lot of uncertainty about fiscal policy. I’m not sure what’s going to happen in terms of tax policy, spending policy, healthcare reform, trade immigration, all those policies. There’s not a lot of clarity around that.”

There still are risks

“When you’re docking a boat, you don’t run it in fast towards shore and hope you can reverse the engine hard later on. That looks cool in a James Bond movie, but in the real world it relies on everything going perfectly and can easily run afoul. Instead, the cardinal rule of docking is: Never approach a dock any faster than you’re willing to hit it. Similarly, in achieving sustainable growth, it is better to close in on the target carefully and avoid substantial overshooting.”

The optimism may be excessive

“I think a lot of people, maybe stock market investors and others, have counted up all the positives and kind of ignored how do you pay for that and the negatives. I think there may be some excessive optimism in the U.S. around how this will affect the economy.”

Normalization expected to start later this year

“we’re committed to slowly shrinking the balance sheet with the same sort of widely telegraphed, gradual, and—frankly—boring modus operandi that we’ve adopted for normalizing conventional monetary policy….Based on my forecast, this will occur sometime later this year.”

 

Dallas Fed President Robert S. Kaplan on CNBC

Expect around 2 rate hikes

“I don’t want to put a specific number on it. If somebody says in the 2s, that sounds about right to me,”

On Tax Reform

“If it’s tax reform, I think that could be helpful. If it’s a tax cut financed by increasing the deficit, my concern is that may give a short-term bump to GDP growth, but not a sustainable bump to GDP.”

Gradual normalization

“I think that removal of accommodation should be done gradually and patiently”

 

 

 

Bank of England’s Monetary Policy Statement (11th May 2017).

Weaker consumption in Q1
“Aggregate demand slowed markedly in 2017 Q1…The slowdown appears to be concentrated in consumer-facing sectors, partly reflecting the impact of sterling’s past depreciation on household income and spending….consumption growth will be slower in the near term than previously anticipated before recovering in the latter part of the forecast period as real income picks up.”
Improved global outlook
“The outlook for global activity continues to improve.  Business surveys and Bank Agents’ reports imply that business investment growth is likely to be higher in 2017 than previously projected. The stronger global outlook and the level of sterling are providing incentives for many exporters to renew and increase capacity.”¨
Inflation has risen above target
“CPI inflation has risen above the MPC’s 2% target as the depreciation of sterling has begun to feed through to consumer prices….The MPC expects inflation to rise further above the target in the coming months, peaking a little below 3% in the fourth quarter.”
There will be consequences to Brexit
“Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years”
A smooth Brexit will help in achieving targets
“In the final year of the forecast, however, the output gap closes and inflation rises slightly further above the target. This is conditioned on the assumptions that the adjustment to the United Kingdom’s new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates.”
http://www.bankofengland.co.uk/publications/Pages/news/2017/003.aspx