Bank of Canada raised rate. Will other central banks follow its lead?

Canada became the first G-7 country to join the US in raising interest rates yesterday, proving the fact that the world’s central bankers have started entering a tightening cycle (as they promised at Sinatra’s forum on central banking).

The Bank of Canada raised its benchmark rate to 0.75% from 0.5% its first time in 7 years, having said that futures rate hikes/adjustments to the current monetary policy stance will be guided by the country’s economic fundamentals – by the incoming data flow. Governing Council responsible for setting rates said the current economic outlook warrants a partial withdrawal of monetary policy assistance.

The next banks in line to tighten their extremely loose monetary policies are the Bank of England, the ECB, and Bank of Japan.

But will they do so?

The Bank of Japan’s tone is still extremely dovish notwithstanding the other banks’ intention to tighten their current monetary policy setting. The BoJ’s Governor Haruhiko Kuroda has recently once again demonstrated its commitment to keep the yield curve at zero level and to weaken the yen to moderate levels if needed.

The Bank of England gives very ambiguous signals with regard to its monetary policy projections. The bank’s governor Mark Carney was even accused of behaving like a “reliable boyfriend” to the financial markets as he had sent the opposite signals about the likely timing of the first interest-rate hike.

The members of monetary policy committee almost introduced a hike at their previous meeting if not 1 – 2 members voting for holding the monetary policy unchanged. Why some of BoE’s officials still refuse to remove a monetary policy stimulus? The British economy is quite strong with the unemployment being at its lowest level in more than four decades, inflation staying well above the bank’s 2% target. Under the following circumstances normally raise the interest rate. But there’s BREXIT. Some analysts believe that the BOE’s policymakers will raise their benchmark rate despite these Brexit-provoked cautions. The exit from the EU has not proven yet to be an economic catastrophe for the UK. In contrast, the economy kept expanding. So, let us keep fingers crossed for a rate increase at the upcoming bank’s meeting.  

While we cannot trust the BoE’s policymakers when they are communicating with financial markets, the ECB’s officials seem to be quite reliable speakers. The only fault of the latter one is that they are not always generous on delivering the details of the monetary policy plans. It is really unnerving. It is still not clear, for example, when the ECN starts trimming its bond-buying scheme, how it will proceed. The present Eurozone economic conditions are more or less favorable for a recourse to tightening measures. The euro area economic activity and confidence remain strong, the unemployment rate continues to fall. The only impediment to the ECB’s way to hiking is still low inflation rates figures (currently staying at 1.3% below the bank’s 2% target). Most analysts expect the ECB’s policymakers to announce the deceleration of their bond purchases’ pace in September. But you should beware that the impact from this announcement will not necessarily produce great swings in the pair with EUR. The ECB may be very creative in how it tapers QE. Don’t expect it sticking to the Federal Reserve’s textbook and just roughly reducing their monthly purchase by a certain amount of money. And this ECB’s creativeness may not send the EUR to heights traders would prefer.