Canada’s central bank raised its benchmark target for the overnight rate by 25 basis points to 0.75 percent, as expected by many analysts, saying data had bolstered its confidence about the economic outlook and recent softness in inflation is judged to be temporary.
The Bank of Canada issued the following statement:
“The Bank of Canada is raising its target for the overnight rate to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. Recent data have bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary. Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time.
The global economy continues to strengthen and growth is broadening across countries and regions. The US economy was tepid in the first quarter of 2017 but is now growing at a solid pace, underpinned by a robust labour market and stronger investment. Above-potential growth is becoming more widespread in the euro area. However, elevated geopolitical uncertainty still clouds the global outlook, particularly for trade and investment. Meanwhile, world oil prices have softened as markets work toward a new supply/demand balance.
Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential. Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon. At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth, a view supported by the most recent Business Outlook Survey.
The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019. The output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR).
CPI inflation has eased in recent months and the Bank’s three measures of core inflation all remain below 2 per cent. The factors behind soft inflation appear to be mostly temporary, including heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing. As the effects of these relative price movements fade and excess capacity is absorbed, the Bank expects inflation to return to close to 2 per cent by the middle of 2018. The Bank will continue to analyze short-term inflation fluctuations to determine the extent to which it remains appropriate to look through them.
Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.”
Argentina’s central bank kept its monetary policy rate at 26.25 percent, saying the national consumer price index it will use to gauge compliance with its inflation target was published for the first time and showed that accumulated inflation was similar to the previously used index for the Greater Buenos Aires area (GBA).
The monthly national consumer price inflation in June was 1.2 percent while annual inflation was 21.7 percent when the GBA index up to December 2016 was combined with the national consumer price index since January, said the Central Bank of Argentina (BCRA).
This is well above the central bank’s target for 2017 inflation of 12-17 percent but the BCRA added that data for May and June, along with other indicators, showed disinflation had resumed.
The June national CPI of 1.2 percent compares with 1.4 percent for Buenos Aires and the national core inflation rate in June was 1.3 percent.
In April the central bank surprised financial markets by raising its rate by 150 basis points after surveys showed that inflation expectations had risen.
The latest survey of CPI inflation expectations for end-2017 rose to 21.5 percent from 21.4 percent in the previous month, the BCRA said.
Expectations for 12-month inflation for June 2018 was steady at 17.0 percent along with expectations for 2018 inflation of 14.9 percent, above the bank’s 2018 target of 8-12 percent.
Argentina’s inflation rate rose to a 2017-high of 40.5 percent in April, with prices driven higher by the government’s removal of energy and transport subsidies to reduce the federal deficit.
In September last year, when the central bank adopted an inflation targeting regime, it said it would use a price index that had the highest geographical coverage.
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With the absence of any top tier news and the markets waiting for further indications on the Fed’s policy when Janet Yellen testifies before Congress on Wednesday, investors and traders are currently in a ‘wait and see’ mode. The week kicked off with most major asset classes moving in tight ranges. The S&P 500 closed 0.1% higher on Monday, while U.S. Treasury yields fell slightly after rallying on Friday’s Non-Farm Payrolls report and the dollar index remained stuck in a very narrow trading range.
It seems we will have to wait for another day for volatility to resume. The two key events on Wednesday are Yellen’s semi-annual testimony and Bank of Canada’s monetary policy announcement. Dollar bulls are counting on the Fed Chair’s continued hawkishness and whether she will provide more details on monetary policy becoming tighter. So far, she is still convinced that inflation weakness is temporary and expects that the sub5% unemployment rate will eventually boost prices. However, it has been more than one year since the unemployment rate dipped below 5% and wage growth is still anemic, making it difficult for many investors to believe that interest rates will increase at the pace suggested by monetary policy makers. It will require more than retracting her latest FOMC statement to encourage bulls to jump in again, such as more specific timing to unwind the $4.5 trillion balance sheet.
Given that other central banks have shifted towards a tighter stance, Bank of Canada’s meeting on Wednesday is going to be of great interest to traders. 13 out the 30 economists recently surveyed by Reuters expect the central bank to hike rates by 25 basis points tomorrow. If BoC joins the Fed this will not only boost the Lonnie but other major currencies as well, as investors will start to anticipate similar moves by the European Central Bank, Riksbank and Bank of England. I suggest keeping a close eye on yield differentials as they will be the major factor impacting currencies for the foreseeable future.
Pound traders will get the chance to hear again from Andrew Haldane, BoE’s Chief Economist, later today. The economist who was usually on the dovish end of policymakers surprised the markets on 21 June when he joined the Hawks. Given that inflation in the U.K. breached the 2% target and the economy did not fall into recession, he thinks that beginning the process of withdrawing some of the stimulus measures provided last year would be reasonable. If he ignores the recent bunch of weak economic releases and continued supporting the idea of policy normalization, the pound will likely make another attempt towards 1.3, but a break above this psychological resistance requires strong labor data on Wednesday.
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Israel’s central bank left its monetary policy interest rate at 0.10 percent, as widely expected, saying all data point to continued solid economic growth in the second quarter of this year and growth for the full year will be higher than previously forecast.
The Bank of Israel (BOI), which has kept its rate steady since March 2015, said overall exports remained sluggish apart from rapid growth in the export of services against the background of a continued appreciation of the shekel and an improvement in world trade.
Israel’s Gross Domestic Product slowed to annual growth of 3.8 percent in the first quarter of this year, down from a pace of 4.6 percent in the previous two quarters.
But BOI staff raised its growth forecast for this year to 3.4 percent from its previous forecast of 2.8 percent, as exports and investments had risen more than expected, with exports expected to continue to improve due to the expected recovery in world trade.
Although growth this year is slower than 2016’s 4.0 percent, data toward the end of last year was affected by vehicle purchases being brought forward due to changes in taxes in January 2017 so the BOI said growth in 2017 will in fact be similar to that in 2016.
For 2018 the BOI retained its growth forecast of 3.3 percent as growth continues to transition to rely more on exports than private consumption. Further changes to vehicle taxes are expected in January 2019 which again is expected to lead purchases being pulled forward, raising 2018 growth.
Israel’s inflation rate rose slightly to 0.8 percent in May from 0.7 percent, slightly below the BOI’s target range of 1-3 percent, with inflation expected to decline in coming months due to lower water and fuel prices, and a reduction in the prices of after-school childcare.
The appreciation of the shekel is also keeping the cost of imported items down. One-year and three-year inflation expectations remain below the BOI’s target tough longer-term expectations are within the target, the central bank said.
BOI forecast annual inflation in the second quarter of 2018 at 0.8 percent and 1.5 percent for the year, down about 0.2 percentage points from previous forecast due to lower oil prices.
The bank’s forecast for the BOI policy rate was unchanged from April, with the rate remaining at the current level in the coming year before being raised in the second quarter of 2018 to 0.25 percent following a number of quarters when inflation is expected to exceed 1.0 percent and one-year inflation expectations move closer to the central of the target range.
A second rate hike is then seen in the fourth quarter of 2018 when the rate is increased to 0.5 percent.
Israel’s shekel has been firming sharply this year though it fell in the last week. Today it was quoted at 3.55 to the U.S. dollar, up 8.4 percent this year.
The Bank of Israel issued the following statement:
- The annual inflation rate is slightly below the target, but the inflation environment remains low: inflation expectations for up to the third year remain below the target range. The increase in nominal wages, the strong economic environment, and inflation worldwide will act to increase the inflation rate, while the appreciation that has occurred in the shekel, increased competition in the economy and measures adopted by the government to reduce the cost of living will act in the opposite direction.
- Indicators of activity point to continued economic growth at a solid pace in the second quarter as well, and the labor market remains strong. Over time, growth of exports has been based on growth of services exports, while goods exports have essentially stood still.
- The global economy continues its moderate improvement, and there is an increase in the growth rate of world trade. In Europe, the recovery is becoming entrenched, and political risk has declined. The Federal Reserve increased the federal funds rate, as expected, but central banks of other major economies are continuing the very accommodative policy for now.
- Since the last monetary discussion, there were relatively sharp changes in cross rates and the effective exchange rate appreciated by less than one percent. In the past 12 months, the effective exchange rate strengthened by 9.4 percent.
- Stability in home prices has been apparent for the past several months, and housing market indicators continue to point to the market cooling off.
The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. The Bank of Israel continues to monitor developments in inflation, the real economy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.
In recent months, the 12-month inflation rate has stabilized at slightly below the lower bound of the target range, and inflation for the 12 months ending in May was 0.8 percent (Figure 1 in the data file). With that, the inflation rate is expected to decline in the coming months, partly as a result of an expected reduction in water and fuel prices and in the prices of after-school childcare. The rate of increase in tradable goods prices remains negative against the background of the appreciation of the shekel, but continues to increase, impacted by relatively high inflation abroad. The rate of increase in prices of nontradable items has moderated, but is within the inflation target. (Figure 3). One-year expectations from the various sources ranged in opposite directions, but all remain below the target range. Third year forward inflation expectations also declined to below the target range, but longer term expectations are anchored within the range. The increase in nominal wages, the strong economic environment, and inflation worldwide will act to increase inflation, while the appreciation that has occurred, the increased competition in the economy, and measures adopted by the government to reduce the cost of living will act in the opposite direction.
All the indicators of economic activity point to the economy having continued its solid growth in the second quarter as well, as conveyed by preliminary data from the Companies Survey (Figure 10), the Purchasing Managers Index, the Consumer Confidence Indices, and the Composite State of the Economy Index. Foreign trade data indicate continued sluggishness in goods exports against the background of the continued appreciation of the shekel and despite the improvement in world trade. Export growth is based on rapid growth in services exports (Figure 12). The entrenchment of growth continues to be reflected in the labor market. The slight increase in the unemployment rate in April and May was accompanied by increases in the participation rate and in the employment rate (Figure 13), the job vacancy rate remains high, and the pace of wage increases continues to accelerate.
Housing market data continue to indicate moderation in demand and a slowing of activity. In recent months, home prices seem to have stabilized (Figure 7), and there were declines in the volume of transactions among all buyer types and in the volume of new home sales. The monthly pace of new mortgages granted continues to moderate, the increase in mortgage interest rates has been halted, and there is some decline apparent in those interest rates in recent months (Figure 8).
Global economic activity continues to improve moderately. The OECD raised its global growth forecast for 2017, and the improvement includes most major economies other than the US, for which the forecast was lowered (Figure 15). The increase in the growth rate of world trade continues, with an emphasis on emerging markets. The messages from several central banks were slightly less dovish, leading to an increase in bond yields, but with the exception of the US Federal Reserve, none of the major central banks changed their accommodative policy, and inflation in most major economies remains below the target (Figure 18). In the US, the assessment is that there was an improvement in the growth rate in the second quarter, following low growth in the first quarter, and the labor market is near full employment, but wage increases remain moderate and are not being translated into inflationary pressures. Assessments are that the administration will have difficulty implementing the fiscal expansion that was expected. In Europe, assessments are that growth continued at a relatively high pace in the second quarter, and political risk declined, which was reflected in, among other things, a decline in yield spreads between Germany and other European countries. In contrast, in the UK a slowdown is apparent due to the uncertainty regarding the Brexit process. In Japan, the Bank of Japan’s assessment is that the output gap has been closed, but inflation remains low. The economic data published in China indicate a continuation of relatively moderate growth. Energy prices declined slightly, and the prices of other commodities were stable.
The minutes of the monetary discussions prior to this interest rate decision will be published on July 24, 2017.
The next decision regarding the interest rate will be published at 16:00 on Tuesday, August 29, 2017. “
Serbia’s central bank left is key policy rate at 4.0 percent, unchanged in the last year, and said it expects inflation to continue to move within its inflation target tolerance range of 3.0 percent, plus/minus 1.5 percentage points, “in the period ahead.”
The National Bank of Serbia (NBS), which last changed its rate in July 2016 when it cut it to the current level, also said inflationary pressures remain low, as reflected by stable core inflation and inflation expectations in the financial and corporate sector that are within the inflation target.
The central bank’s comment on the inflation outlook is only slightly different to that in June when it said it expected inflation to move within its target tolerance band “in the next two years.”
Serbia’s inflation rate eased to 3.5 percent in May from 4.0 percent in April, with the NBS saying changes in inflation since the start of this year has been affected by the recovery of oil prices in the second half of last year along with the prices of vegetables and firewood that were higher than expected due to adverse weather.
The central bank expects its inflation target to be met due to the recovery of domestic demand and inflation abroad, and the high base effects from the prices of petroleum products.
The National Bank of Serbia issued the following statement:
“At its meeting today, the NBS Executive Board decided to keep the key policy rate at 4.0%.
In making the decision, the NBS Executive Board was guided by inflation factors, inflation projection and the effects of past monetary policy easing.
Since the start of the year, inflation has been moving within the target tolerance band. Similarly to other countries, inflation movements were led by the recovery of global oil prices as of the second half of 2016, as well as the prices of vegetables and firewood which were higher than seasonally expected due to adverse weather early this year. Reflecting a drop in these prices, in accordance with our expectations, year-on-year inflation fell to 3.5% in May. Inflationary pressures remain low, as confirmed by low and relatively stable core inflation, moving at around 2% year-on-year since early 2017, as well by financial and corporate sector inflation expectations trending within the target band both one- and two-years ahead.
The NBS Executive Board expects inflation to continue moving within the bounds of the target tolerance band of 3.0%±1.5 percentage points in the period ahead. According to expectations, inflation target will be achieved owing to the gradual recovery of domestic demand and inflation abroad, and the high base effect from the prices of petroleum products.
The international environment is still fraught with uncertainties as to the developments in international commodity and financial markets. Uncertainties also surround global primary commodity prices, particularly oil prices, which are under the impact of heightened geopolitical tensions. Uncertainties in the international financial market continue to stem largely from the diverging monetary policies of leading central banks, the Fed and the ECB, which may affect capital flows to emerging economies. As underscored by the NBS Executive Board, the resilience of Serbia’s economy to potential negative shocks from the international environment increased owing to the significant narrowing in internal and external imbalances and more favourable macroeconomic prospects.
The next rate-setting meeting will be held on 10 August 2017.”