Markets are expecting bigger rate cuts for this year after the European Central Bank lowered its economic forecast for this year. According to Bloomberg, markets are estimating one percent rate cuts for this year.
The ECB’s new economic growth estimate for this year is 0,6%.
The ECB president Christine Lagarde said in the press conference, that the governing council did not discuss about rate cuts at all during its meeting today.
The European Central Bank is having its first monetary meeting this year today in Frankfurt.
The recent market discussion of the possible rate cut timing has been on hold since Ms Christine Lagarde said in January it could be summertime this year.
The “minutes” of December 2023 meeting show that the market expectation at that time was more quickly. The minutes reminds that a 25 basis points cut in April 2024 has been fully priced in markets as of December 13th.
The ECB decided to keep the rates the same at its December 13-14th meeting in Frankfurt. The rates are 4% for deposit facility, 4,50% for refinancing operations and 4,75% for marginal lending facility.
The Bank of Japan decided to continue with its quantitative and qualitative easing monetary policy in its meeting today. The Central Bank said it will continue its yield curve policy for short and long term.
This will mean that the yield of the Japanese government 10-years bond will be around zero percent.
The US Federal Reserve published its minutes related to the FOMC meeting at the end of October- November 1st on Tuesday.
The Central Bank stated that the federal funds rate was at or near its peak and would be held there at least until the June 2024 FOMC meeting. According to Fed, there was a roughly 30 percent probability of raising rates in near coming meetings.
– Financial conditions continued to tighten, driven by higher yields on Treasury securities as well as by lower equity prices and a stronger dollar, which themselves partly reflected higher interest rates. Because earnings expectations had held up well in recent months, the effect of higher interest rates on equity prices likely took place largely through valuations, Fed said.
Market participants expected that the federal funds rate was at or near its peak and would be held there at least until the June 2024 FOMC meeting. According to Fed, there was a roughly 30 percent probability of a 25 basis point increase at either the December or January FOMC meeting.
The data available at the time of the October 31–November 1 meeting indicated that U.S. real gross domestic product (GDP) had expanded at a strong pace in the third quarter, Fed stated.
-Labor market conditions remained tight, with continued strong job gains and a low unemployment rate. Consumer price inflation remained elevated, it said.
-The increase in longer-term Treasury yields appeared to be mostly attributable to higher term premiums, as stronger-than-expected economic data seemed to increase the uncertainty regarding how long policy rates might need to remain high.
-Meanwhile, equity prices decreased, and spreads on investment- and speculative-grade corporate bonds widened. Financing conditions tightened further, and borrowing costs continued to rise, Fed said.
In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time, Fed said.
-All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks, Fed reminded.
The Bank of England Governor Adrew Bailey stated today in the Treasury Committee hearing that the Central Bank is on track to get the inflation back to 2% level.
On the other hand, he stated that the markets are underestimating the risks of persistent inflation. He tought that it was too early to propose rate cuts in the UK. This means that the fall in October inflation, is not enough for the Central Bank.
Bailey has also pointed out two different risks topics, which might have impact on markets. The first is that the domestic inflation remains high partly to inefficiencies in the job markets. The second is the situation in the Middle East and if it will drive oil prices up.
Ice Brent oil is trading now at 81,53 dollars per barrel,down 0,96%. The current bank rate is 5,25% and the next monetary meeting will be in December 14th.
On Wednesday, the PM Rishi Sunak Government will present its Autumn Report in the Parliament. The media spekulation has included tax reliefs for businesses.
According to US Federal Reserve Chairman Jerome Powell, the central bank monetary committee is proceeding carefully. He was speaking at the Economic Club of New York on Thursday.
– A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little, he said.
He said the Fed is determined to turn the inflation back to 2 % level over time and that the FOMC is proceeding carefully. The monetary decisions are based on the incoming data.
The President of the European Central Bank Christine Lagarde said today that the green transition will be integrated into the monetary policy. She was speaking in a conference in Paris today.
– The green transition is a uniquely difficult policy challenge because the stakes of failures are so high and the path to success is so complex. But the answer is to follow through with the transition which means understanding the challenge it entails and ensuring the costs are shared fairly. More needs to be done to foster the market for green finance which would reduce risk premia and help lower financing costs, Lagarde said.
At the event the Central Bank together with European Investment Bank and the International Energy Agency published also their call for actions to accelerate the clean energy transition for leaders in governments, finance and industry.
– Frontloading clean energy investment significantly reduces medium-term costs and risk for companies and households, the organisations stated in the release.
The US Federal Reserve minutes show, that markets became more confident that the possible recession could be avoided in 2024. The minutes reflected the situation in the July FOMC meeting 25-26.
According to the minutes, the timing of the possible recession was again pushed later and the possibility of avoiding a recession through 2024 grew noticeably.
During the period bank equity prices increased and outperformed the S&P 500 index modestly. Sector’s ability to fund loans to businesses and households was generally good altough credit tightening increased. The minutes stated that the economic forecast for July FOMC meeting was stronger than the June projections.
Inflation was estimated to ease further over 2024 and by 2025 total price inflation was expected to be 2,2% and core inflation 2,3%.
The Bank of Japan announced more flexibility in its yield curve control program for the Japanese 10 year goverment bond yields. The Central Bank said on Friday that the target of the 10-year bond yields are still at around 0%, but said it allows +/- 0,5% upper and lower limits as references.
The Central Bank decided then to continue with its easing monetary policy in contrast to other central banks like the US Federal Reserve, European Central Bank and the Bank of England.
The Bank of Japan also announced it will buy the Japanese government 10-year bond at 1% in fixed-rate operations every business day.
The Bank of Japan decided on Friday to continue the quantitative and qualitative easing of monetary policy. According to the Central Bank, the easing is done with Yield Curve Control aiming to achieve the price stability.
The monetary policy will continue as long as it is necessary. The Bank of Japan will continue expanding the monetary base until year on year rate exceeds 2 percent and stays above the target in a stable manner.
– Japan’s economy is likely to recover moderately towards around the middle of fiscal 2023, the Bank stated.
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