Central Banks Round Two: Don’t Get Carried Away with the Dovish Talk

Central banks around the world have been very busy in the last two weeks. Last week the Federal Reserve Bank, the European Central Bank, and the Swiss National Bank all met and none of them made any changes to their current rates, but all three seemed to be leaning toward a more dovish stance heading into 2020.

This week we have had the Bank of England, Bank of Japan, and Riksbank (the central bank of Sweden) all meet and we saw a different outlook from these three central banks. The Riksbank was the only one that took action, but the other two seemed a little less dovish than the banks we heard from last week.

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The Riksbank was one of the first central banks to move to a negative rate strategy and it did so all the way back in 2009. The bank started to charge commercial banks to hold deposits in 2009 and would eventually move its key rate to -0.25% in 2015, just after the ECB moved to a negative rate policy. On Thursday the Riksbank hiked its rate back to 0% as the inflation outlook calls for a rate of 2%.

The Bank of England announced that it would keep its key rate at 0.75%. This was a little bit of a surprise as the money market rates were signaling that there was a high probability of a cut within the next year. With the announcement, the BOE also pointed out that a modest increase in the rate may be necessary if there aren’t any additional risks that come up.

The Bank of Japan kept its key rate at -0.10% and it seemed more upbeat about the Japanese economy. The BoJ issued a statement following the meeting and it included this clip: “Japan’s economy is likely to continue on a moderate expanding trend, as the impact of the slowdown in overseas economies on domestic demand is expected to be limited, although the economy is likely to continue to be affected by the slowdown for the time being.”

The People’s Bank of China didn’t meet in the last two weeks, but it did make a rate change, cutting the rate on 14-day reverse repos to 2.65% from 2.70%. The bank cut the rates on 7-day repos from 2.55% to 2.5% in November.

Seeing the latest central banks change course from the statements last week could be the product of the geopolitical landscape. We saw China and the U.S. reach an agreement on the first phase of a trade deal and we saw Prime Minister Boris Johnson win the election as Prime Minister. Johnson immediately laid out his agenda for Britain’s divorce from the European Union.

Central bankers are viewing these developments as positives for the global economy going forward, or at the very least they are seeing them as removing some uncertainty. The trade deal is probably having a greater impact on the global economy while the election of Johnson and the Brexit plan are obviously having a bigger impact on the BoE and its policies. Going back to mid-August, British stocks have been rallying and so has the pound. Since Johnson was elected, British stocks jumped sharply, but the pound fell sharply.

The initial reaction to the news about the trade deal was somewhat muted, but the S&P would eventually rally on Monday, December 16. The announcement from the White House about the deal was issued after the market closed on Friday, December 13.

The global economy is still showing signs of weakness, but the hopes for a rebound could be pinned to the global trade outlook. The Eurozone economy is still shaky at best and many are concerned that once President Trump reaches a deal with China that he will set his sights on Europe. This would put the U.S. at an advantage in any negotiations, as long as the U.S. economy is expanding and the European economy is on shaky ground.

One aspect of a less dovish outlook from the central banks is that it could help banks in 2020. When interest rates are shifting from a lowering cycle to a hiking cycle, banks benefit from the spread between borrowing rates and deposit rates. I mentioned in my article from earlier this week that the banking industry is one of my favorites heading into 2020.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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