The Daily Update - Another Day for Central Banks

It’s another one of those central bank days today, with the European Central Bank, Bank of England and not forgetting the TCMB (the Turkish Central Bank) announcing policy decisions this afternoon. Although the last decision to raise rates in the UK was unanimous, and subsequent relatively strong data has supported their decision, today the Bank unanimously decided to hold its policy rate at 0.75% (and may remain the case until after Brexit) signaling continued caution over the near-term uncertainties of leaving the EU. Contrastingly Turkey continues to face inflation which has surged to 17.9%: almost 4x the TCMB’s target. The TCMB demonstrated its independence: ignoring Turkish President Recep Tayyip Erdogan’s bluster for stuffing the economy with cheap credit to raise their 1 week repo rate all the way to 24% from 17.75%. Prior to the announcement the lira was down over 40% this year but it pared 3% of these losses immediately following the news.

Lastly, after a prolonged summer break the ECB published their policy rate, holding at -0.4%, along with the ECB committee forecasting flatter figures for economic growth: down 0.1 percentage points to 2% and 1.8% for 2018 and 2019 respectively. This primarily reflects the impact of global trade tensions, but in the following press conference in Frankfurt Mario Draghi spoke of “underlying strength of the economy” and expectations “that the downside risks are going to be mitigated by the improvements in the labour market and rising wages”; he went on to stress again that risks continued to be “broadly balanced”.

Draghi also finally confirmed the halving of bond purchases next month and anticipates phasing out the programme by the end of the year. Inflation forecasts were held at 1.7% through to 2020 and the ECB reiterated that “the present monetary policy stance is robust” and current record low rates of -0.4% should remain in place "at least through the summer of 2019". “Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.” Indeed, Bloomberg implied probabilities still show only a 33% rate hike probability between now and the late July 2019 meeting, with September 2019 being the consensus view.

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