A week punctuated by central banks announcements

Last week moved to the rhythm of central bank meetings, and it was the Bank of Canada that got the ball rolling. As expected, the BoC held its key rate steady at 0.25%, but it has also started to pare back its bond buyback programme, from CAD 4 billion to 3 billion per week. It is the first central bank to do so. Also, to the market’s surprise, it revised its forecasts concerning the future development of the key rate. Official remarks indicates that the rate will remain at 0.25% until inflation returns sustainably to 2%. According to BoC forecasts, this should happen sooner than anticipated, in the second half of next year and no longer in 2023 as previously expected. These announcements come as the Canadian economy is doing better than anticipated: the second and third waves of the pandemic should have a smaller impact on the economy than the first. The BoC now expects its GDP to grow 6.5% in 2021, up from a forecast of 4.0% previously. In the wake of these announcements, the Canadian dollar gained more than 1% against the US dollar, and then continued to appreciate to currently settle around 1.24, its best level since March 2018.

A day later, it was European Central Bank addressing the markets. By leaving its monetary policy unchanged, it is continuing to support the economy in the eurozone. The key interest rate remains at -0.50%, the Pandemic emergency purchase programme (PEPP) remains fixed at €1.85 trillion and available at least until March 2022, and lastly the rate of asset purchases remains ‘significantly higher’ today compared to the first months of the year. Christine Lagarde wanted to reassure the markets even as the rebound in activity is slow. Under the effect of vaccinations and gradual reopening, Ms Lagarde expects a strong rebound in economic activity during the year. The latest German figures point in this direction, with growth revised upwards from 3.0% to 3.5% this year and expected to reach 3.6% in 2022. The business climate (IFO index) is also improving.

The Russian central bank (CBR) met last Friday and decided to raise its interest rate again by 50 basis points to 5.0%. It had already increased the key rate by 25 bps in March of this year. This was an expected decision considering the country has been experiencing a sharp rise in inflation for several months (+5.8% year-on-year, but +8.2% for basic products). In addition, for the first time in its history, it has decided to publish an estimate of the future development of key interest rates in the form of intervals. Thus, the CBR is forecasting that the rates will be between 4.8% and 5.4% in 2021, between 5.3% and 6.3% in 2022 and between 5% and 6% in 2023 Over the past week, the rouble has strengthened, also supported by new policies such as the end of the hunger strike by political opponent Alexei Navalny or the withdrawal of the armed forces from the Ukrainian border. One dollar can now buy 74.9 roubles.

Status quo in Japan: after two days of meeting, the BoJ is keeping its main interest rate fixed at -0.1% and renewing its measures to support the economy, even as the epidemic regains strength in the country due to an outbreak of coronavirus variants. Japan is experiencing a sharp rise in new cases and has declared a state of emergency for the third time in the capital Tokyo. The economic rebound is expected to be moderate, and the central bank has lowered its inflation forecasts. It should not reach the 2% target for several years. After a high of 107.5 against the dollar on April 23, the Y=yen is losing ground with a current exchange rate of 109.

In the United States, the weekly figure of new job seekers fell to a low since the start of the pandemic, to 547,000 against 610,000 expected.  But 17 million Americans continue to receive unemployment benefits, slightly less than the week before. Of these, 12.5 million benefit from pandemic-specific programs that expire in September. In order to fund his stimulus plans, president Biden is reportedly considering doubling the capital gains tax for people with annual incomes above $1 million. This prospect has slightly disrupted the equity markets, which have been on hiatus in recent days even as company earnings and economic figures are positive. Note, for example, the strong rebound in real estate activity with a 30% increase in housing starts and an almost 67% increase in new home sales over one year. We conclude our tour of central banks with the US Federal Reserve meeting today. The market expects the Fed to remain accommodative and not tighten monetary policy yet. Government bond yields have fallen since the end of March, with the 10-year rate falling to 1.54% last Thursday, and 1.64% currently against 1.74% on 31 March. It seems that the members of the Fed have adopted a wait-and-see attitude and wish to witness the concrete effects of the recovery before raising interest rates. In the meantime, the euro-dollar parity has been moving without a clear direction in a range between 1.1994 and 1.2117 over the last week.