Central Bank Rate Hike Expectations – Who is Expected to Ease

Bank of Canada Bank of England Bank of Japan central bank rate hike expectations Kathy Lien rbnz rate decision Reserve Bank of Australia reserve bank of australia intervention reserve bank of new zealand

Central banks have been particularly vocal since the beginning of the year, either by expressing their skepticism or satisfaction with the easing of credit conditions and incoming economic data. For some countries, this has changed rate hike expectations, for others it simply confirms existing views. As you may know, central bank rate hike expectations change often but here’s the latest. Find out which central banks are expected to keep monetary policy unchanged in the coming year and which ones are expected to ease below!

Federal Reserve -- No Changes in 2012 (surprise, surprise)

European Central Bank -- No more Rate Cuts in 2012 -- upgrade from the pricing in of 25bp of easing in Jan

Bank of England -- No Changes in 2012

Bank of Canada
-- No Changes in 2012

Reserve Bank of Australia
-- Mkt was pricing in 75bp of easing this yr back in Jan, now only 50bp expected

Reserve Bank of New Zealand -- No Changes in 2012

And here are the details!

Central Bank Rate Hike Expectations – Who is Expected to Ease

Bank of Canada Bank of England Bank of Japan central bank rate hike expectations Kathy Lien rbnz rate decision Reserve Bank of Australia reserve bank of australia intervention reserve bank of new zealand

Central banks have been particularly vocal since the beginning of the year, either by expressing their skepticism or satisfaction with the easing of credit conditions and incoming economic data. For some countries, this has changed rate hike expectations, for others it simply confirms existing views. As you may know, central bank rate hike expectations change often but here’s the latest. Find out which central banks are expected to keep monetary policy unchanged in the coming year and which ones are expected to ease below!

Federal Reserve -- No Changes in 2012 (surprise, surprise)

European Central Bank -- No more Rate Cuts in 2012 -- upgrade from the pricing in of 25bp of easing in Jan

Bank of England -- No Changes in 2012

Bank of Canada
-- No Changes in 2012

Reserve Bank of Australia
-- Mkt was pricing in 75bp of easing this yr back in Jan, now only 50bp expected

Reserve Bank of New Zealand -- No Changes in 2012

And here are the details!

Why BoE is Expected to Ease and ECB is Not

Bank of England BoE rate cut ECB ecb rate cut ecb rate hike Kathy Lien

Both the Bank of England and the European Central Bank will be making monetary policy announcements on Thursday. The market expects the ECB to remain on hold and BoE to increase their asset purchase program by GBP 50 billion. A quick look at the following tables explain why the BoE is expected to ease and the ECB is not. Since the last monetary policy meeting, Eurozone economic data was neutral / mixed to bullish. U.K. data on the other hand was neutral / mixed to bearish.

What are Central Banks Expected to do in 2012?

Australian Dollar Bank of Canada Bank of England BoE rate cut ECB Federal Reserve forex blog Kathy Lien Reserve Bank of Australia reserve bank of new zealand

The New Year has begun and it is important to see what the market is pricing in for central banks this year. As you may know, central bank rate hike expectations change often but as of last week, most central banks are expected to keep monetary policy unchanged in the coming year but one is expected to ease aggressively. Find out who below!

Federal Reserve -- No Changes in 2012

European Central Bank -- Possible 25bp Cut before Year End

Bank of England -- No Changes in 2012

Bank of Canada -- No Changes in 2012

Reserve Bank of Australia -- Aggressive Rate Cuts this Year, 25bp by March!

Reserve Bank of New Zealand -- No Changes in 2012

And here are the details!

FOMC, ECB, RBA Meetings: What is Priced in?

2011 british pound forecast 2011 cad forecast 2011 dollar forecast 2011 euro forecast aud/usd Bank of England ECB ecb rate cut ecb rate hike Fed Rate Cut Fed Rate Cut Expectations FOMC Kathy Lien Reserve Bank of Australia

The Federal Reserve, European Central Bank and the Reserve Bank of Australia have monetary policy meetings scheduled this week and some investors expect these central banks to change monetary policy. Here’s what the market is pricing in according to interest rate futures. You can compare them with the Central Bank expectations back in September. What is interesting is that the market does not expect the ECB to cut interest rates this year even though many economists predict a 50bp cut in December.

FED -- Nada for 2011 and 2012

ECB -- 25bp rate cut by July (sharp upgrade from Sept when rate cut expected in Dec)

BOE -- Nada for 2011 and 2012 but slight shift to dovish bias

BOC -- Rate Cuts now expected in 2012, down from rate hike by April

RBA -- 25bp Rate cut by Dec -- upgrade from 100bp by year end

RBNZ -- No Major Changes, Rate Hike Expected July 2012

And here are the details:

What Investors Expect Central Banks to Do in 2011 and 2012

Bank of Canada Bank of England Bank of Japan ECB Fed Rate Cut Expectations Federal Reserve Kathy Lien Reserve Bank of Australia reserve bank of australia intervention reserve bank of new zealand

Central Bank Interest Rate Expectations can and do change based upon economic and market developments. The last time I provided updated CB expectations was in July (yes, I apologize for being tardy) but since then we have seen major changes in investors expect central banks to do this year and next.

Here are the cliff notes

FED -- Nada for 2011 and 2012

ECB -- 25bp rate cut by Dec?! (In July no rate hike or cut was expected for 2011 and 1H2012)

BOE -- Nada for 2011 and 2012 but slight shift to dovish bias

BOC -- Rate Cuts now expected in 2012, down from rate hike by April

RBA -- Major Rate Cuts Expected -- 100bp by year end?!

RBNZ -- No Major Changes, Rate Hike Expected March 2012

And here are the details:

Fed: Data Shows Mkt Pricing in Q2 Rate Hike?

2010 japanese yen forecast 2011 british pound forecast 2011 cad forecast 2011 dollar forecast 2011 euro forecast Bank of Canada Bank of England Bank of Japan Bernanke Fed rate hike Federal Reserve forex blog Kathy Lien

It has been a while since I provided updated numbers for the market’s rate hike expectations and I will chalk it up to my travels! Rate expectations are always changing and a lot has happened over the past month. Its always important to keep track of them because they reflect what investors are pricing in!

Here are the latest numbers and highlights (compared to March)

Fed -- One 25bp rate hike expected by Q2 2012 > Compared to Q1 rate hike before
BoE -- First Rate hike expected in Jan > compared to prior forecast for 50bp rate hike in 2011
ECB -- 50bp of additional tightening expected > compared to 75bp after April hike
RBA -- Close to one 25bp rate hike by years end > significant upgrade from March expectations
RBNZ -- One rate hike in Jan 2012 > bumped up from March
BoC -- 25bp rate hike in Oct > slight downgrade in rate hike expectations

New BoE Member Broadbent: What’s His Story?

2011 british pound forecast Bank of England Ben Broadbent Kathy Lien

At the end of this month, the Bank of England will add a new member to their Monetary Policy Committee -- Ben Broadbent. He will replacing Andrew Sentance who has voted for an interest rate hike since the beginning of the year. Sentance was the most hawkish member of the MPC, having just voted for a 50bp hike earlier this month. His departure will leave the central bank with a less hawkish bias. As a new member of the MPC that joins the BoE at a critical turning in point in monetary policy, it is important to understand as much as we can about Ben Broadbent.

· Mr.Broadbent is the chief European economist at Goldman Sachs

· Gained a first-class honors degree from the University of Cambridge

· Received his Ph.d from Harvard University, where he was a Fulbright Scholar

· Worked previously for H.M. Treasury, the Bank of England, and at Columbia University as an Assistant Professor

· Joined Goldman Sachs in 2000 as Senior European Economist; Became MD in 2006

· Mr Broadbent, who has worked for the Treasury and the Bank as well as in academia before joining Goldman in 2000, was appointed by Chancellor George Osborne after being interviewed by a panel including the Treasury’s Dave Ramsden and Tom Scholar as well as former MPC member Kate Barker. He was chosen from 27 candidates.

· Mr Broadbent will be paid £131,771 -- £101,362 in salary and £30,409 as a pension supplement. This is less than he is thought to have earned as a Goldman managing director

· He will join on June 1 and make his first decision on June 9

· Broadbent has indicated in recent notes that he would support rate rises from the current historic low of 0.5pc, but is not as committed to action as Mr Sentence

· Mr Broadbent’s research at Goldman suggests he is upbeat about UK growth for 2011

· His thoughts on Rate Predictions:

“Last week, we brought forward the first hike in our forecast from Q4 to May. We now expect one 25 basis point increase per quarter through to end-2012.”

· His thoughts on Growth Outlook:

“The composite PMI remains consistent with growth of around 3pc quarter-on-quarter annualised in private-sector non-energy output, however, and this should allay some fears that the contraction in Q4 is representative of underlying trend activity. If we also adjust for the sterling price of oil, which has risen by around £7.50 per barrel since January, the composite PMI remains on the cusp of rate-hike territory.”

· His thoughts on Wages:

“The January data suggest wage growth is less disinflationary rather than more inflationary. But the trajectory of settlements over the coming months may soon look steep enough to turn the doves on the MPC.”

· In a note published on Monday, Mr Broadbent said a May rate hike would depend on whether first-quarter growth showed the strength implied by private sector surveys and whether private sector wage settlements pick up

· Broadbent has said that whether the BoE will raise rates depends on first-quarter growth living up to the expectations of a sharp rebound and private sector wage deals picking up further

From May 17th, 2011 Testimony to the Treasury Select Committee
· He said the effect of QE on the economy was “hard to gauge”, although he said it was “hard to imagine there’s been no impact”

· Mr.Broadbent ruled out the need for more QE, and appeared to downplay the need for immediate policy tightening

· He expected inflation to fall next year, broadly along the lines of the MPC’s forecast

· He said it was important for policymakers to monitor a range of indicators of inflation expectations, but that he saw no strong evidence that expectations had become de-anchored from target

· Mr Broadbent noted three main Downside risks to the economy:

o a sudden rise in household saving

o higher commodity prices (which would squeeze real purchasing power)

o higher bank funding costs from financial market stresses

· He said it was important for policymakers to monitor a range of indicators of inflation expectations, but that he saw no strong evidence that expectations had become de-anchored from target

· Initially, Mr.Broadbent was expected to be towards the hawkish end of the committee

· However, he might not be supportive of early policy tightening according to his testimony today, in which he highlighted

o downside risks to activity

o a lack of concern about inflation expectations

o & confidence that inflation will fall back towards target

Forex: Major Changes to Rate Hike Expectations

2009 british pound forecast 2010 dollar forecast Australian Dollar Bank of Canada Bank of England British Pound Canadian Dollar ECB eur/usd Fed rate hike Federal Reserve Kathy Lien

Over the past 3 weeks, central banks around the world have made a number of comments that have affected rate hike expectations. On Jan 27th, I showed where rate hike expectations were at the time and since then a number of interesting changes have occurred.

First, the market is now pricing in a 25bp rate hike by the Fed in Dec. Last month, no rate hike was expected. Close to 70bp of tightening is now expected from the Bank of England, up from 50bp. The market went from pricing in 2 rate hikes from the Reserve Bank of New Zealand to one. The European Central Bank and the Bank of Canada are now expected to tighten by 75bp this year instead of 50bp. A lot can change in 3 weeks =)



Chart: BoE Inflation Report Rarely a Nonevent for GBP

2009 gbpusd forecast 2011 british pound forecast Bank of England British Pound Kathy Lien

The Bank of England’s Quarterly Inflation Report is one of the most important pieces of documents released by the central bank. The Inflation Report includes the central bank’s latest growth and inflation forecasts and frequently telegraphs their plans for monetary policy. Although the Monetary Policy Committee has not changed interest rates in nearly 2 years, they getting close to raising rates and because of that, investors are watching their every move.

The publication of the Inflation Report is rarely a nonevent for the GBP/USD. The following chart from Barclays Capital shows the rollercoaster like reaction in the currency pair days after the report is released. With the Bank of England upgrading its inflation forecast and downgrading its growth forecasts, sterling traders are as confused as ever and this confusion could turn into volatility for the British pound. The sell-off in the GBP/USD today indicates that the Quarterly Inflation Report was not nearly as hawkish as investors had hoped but many economists are still looking for the BoE to raise rates this year. In the short term, the less hawkish tone of the report could lead to additional position adjustments in the GBP but in the long term, the GBP is still headed higher because the BoE remains at the verge of raising interest rates. There is no question that the U.K. central bank will tighten before the Federal Reserve.

What is the Shadow BoE Monetary Policy Committee?

2011 british pound forecast Bank of England British Pound Kathy Lien

Since the beginning of the month, the British pound has staged a dramatic rally against the U.S. dollar on the belief that the Bank of England will have to raise interest rates very soon. In slightly more than a month, the GBP/USD has rallied from a low of 1.54 to a high above 1.6250. Interest rate futures show that investors are looking for 3 quarter point rate hikes from the BoE this year, which would make them one of the most aggressive G7 central banks. However this hawkish expectation from investors is completely at odds with the sentiment in the Bank of England. Monetary policy makers are convinced that the rise in inflation pressures is temporary and therefore does not necessitate action by the central bank. However two members have already dissented from this majority view and more could follow.

The Bank of England’s monetary policy is in focus this week because they have a monetary policy meeting but no changes are expected to made. However the pound has held onto its gains after the Shadow Monetary Policy Committee voted 5-4 to raise interest rates in Feb. At this point, you may wonder, who makes up the Shadow MPC and whether they even matter at all.

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists in the U.K. that meet at the Institute of Economic Affairs, to discuss the state of the international and British economies. Their first meeting was held in 1997 and have met once a month since then. The decisions and minutes of the SMPC are published a few days before the Bank of England’s own interest rate decision and are oftentimes referred to as a guide for what the MPC could do. Like the Monetary Policy Committee, there are 9 voters at each meeting.

For the first time in this cycle, the Shadow Monetary Policy Committee has voted to raise interest rates. The decision was not unanimous with 5 members voting for a rate hike and 4 voting against it. Although the shadow council failed to predict the last 2 rate cuts by the MPC, their decisions matter because it helps investors get a sense of what intelligent economists who follow the U.K. economy closely are thinking. According to the SMPC, there were 3 main reasons why the 5 members voted for a rate hike:

1. Threat to the Credibility of the Inflation Fighting Mandate of the Central Bank

2. They believe that the greater risk for the global economy is overheating than depression

3. They believed that the slide in the GBP reflected the laxity of the U.K.’s monetary policy compared to other countries

Although the chance of the BoE actually raising interest rates is slim, what the SMPC votes tell us is that we are getting closer to a possible rate hike. This means that hawkish comments from central bank officials could easily set off additional gains in the GBP/USD that could cause the currency pair to challenge its November highs.

British Pound: 5 Reasons Why the Pound is Being Pounded

2009 gbpusd forecast Bank of England British Pound forex blog Kathy Lien

With mixed to slightly better than expected U.K. economic data, traders may be scratching their heads about why the British pound has collapsed more than 300 pips this morning. Here are a couple of reasons:

1. Britain’s Prudential announced plans to buy AIG’s Asia operations for $35.5 billion in cash and stock -- since this is partially a cash deal, it will involve selling British pounds.

2. Gilts Losing Luster -- According to the FT, the gap between the U.K. and German interest rate has risen to the highest level since 2005. Even though the official U.K. interest rate is less than the Eurozone’s interest rate, the cost of servicing government borrowing in the U.K. over Germany has increased significantly.

3. BoE Could Raise QE -- Based upon the dovish comments from Bank of England officials at the beginning of last week, there is a tiny risk of the BoE raising the size of their QE program on Thursday. Even if they do not, the tone of their statement will be dovish which is also bearish for the GBP.

4. Short GBP/USD Positions Hit Record Highs -- According to the CFTC Commitment of Traders report published on Friday, short GBP and EUR positions have hit the highest level ever. Forex traders are clearly very bearish pounds and they have good reasons to be with jobless claims at 12 year highs and consumer spending falling by the most since Feb 2009.

5. Stop Orders Tripped, Hedge Fund Selling -- There has also been a lot of chatter about hedgies selling the GBP. There were a ton of stop orders sitting at the previous 9 month low of 1.5117. When the GBP/USD broke that level, the currency pair dropped very quickly. The selling exacerbated when stop orders at the 1.50 level were tripped, but the big move came when the GBP/USD broke below 1.4935 -- it fell 158 pips in 3 minutes.

With so many straws on the camel’s back, it was bound to fall under the pressure. A bounce is not out of the question after such a big move particularly since the GBP/USD has not able to rally for the past 9 trading days. However unless the BoE stops talking about QE and we don’t expect them too, the GBP will continue to be the worst performing currency.

Finally, the GBP/AUD has hit a record low. Last week, I blogged about how shorting GBP/AUD is my favorite trade. At the time it was trading above 1.73 and today it hit a low of 1.6545. Hopefully you managed to bank some solid profits. I still expect it to move lower -- but this is where trailing stops should be implemented to lock in profits.