Global Central Bank Actions and What they Mean for the Future

In the first half of the year, global stocks continued to rally. One reason behind the rally was the dovish statements from the global central banks. This article will look at the recent actions of the world’s central banks and what the actions will mean for stocks in the rest of the year.

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The Federal Reserve

Last year, the Federal Reserve hiked rates four times. This was a vote of confidence to the US economy. In the December meeting, the Fed’s dot plot was signaling three more hikes for this year.

This led to a sharp decline in US stocks and an immediate retreat by the Fed. This year, officials have sounded relatively dovish. In the most recent meeting, the officials said that there was a likelihood that they will slash interest rates this year.

Investors are now pricing for a rate cut in the July meeting and another one in the December meeting. This could change, especially after the strong June jobs report.

Fed Chart july 2019

Reserve Bank of Australia

This month, the RBA slashed interest rates by 25 basis points. This was the second month of consecutive 25 basis points rate cuts. The cuts happened as the central bank continued to support the economy, which has been lagging as the trade war between the US and China has continued.

China is particularly important for Australia because that is where it exports two thirds of its goods. With interest rates at record lows, the bank will likely pause in the coming meetings.

RBA chart july 2019

Bank of Canada (BOC)

Bank of Canada has met this week to deliver their interest rates decision. The past interest rates was at 1.75% and there was a likelihood that the bank left them unchanged. The bank was under no pressure to cut rates this year.

However, if the US implements more rate cuts this year, the BOC could be under pressure to cut rates in the coming year. The chart below shows the performance of the Canadian dollar against the USD.

BOC chart july 2019

European Central Bank (ECB)

Last year, the ECB announced two major monetary policy decision. First, it announced that it will end the quantitative easing program in December last year. Second, it announced that it will hike rates ‘at least through summer’ of this year.

In December, it ended the QE but the second pledge has been difficult to keep. The bank has continued to extend the period from summer, to December, to the first quarter of the coming year. In the upcoming meeting, the bank could announce more stimulus to support the economy and rule out on any near-term rate hikes.

ECB chart july 2019

Riksbank and Norges Bank

Last week, the Sweden central bank left interest rates unchanged and pointed that a rate hike could come later this year. This was in line with the expectations. The last time the central bank raised rates was in the December meeting, when they hiked by 25 basis points.

The relatively hawkish tone is in line with the actions of the Norges Bank, which has raised rates three times since September last year. The chart below shows the performance of the Swedish and Norwegian krona.

riskbank and norge chart july 2019

Bank of England

In the last meeting, the Bank of England (BOE) left interest rates unchanged in line with the consensus estimates. While the decision was dovish, the bank’s actions sounded a bit hawkish. In the statement, the bank said that it was prepared to hike if there was a smooth Brexit.

However, chances of a smooth Brexit are easing, as Boris Johnson is likely to replace Theresa May as the next prime minister.

boe chart july 2019

Bank of Japan

The BOJ is the third most important central bank in the world after the Fed and ECB. While the Japanese economy has remained being strong, it has not generated enough inflation to warrant a rate hike.

The rates remains in the negative and the bank will likely remain unchanged for the next one year. The chart below shows the performance of the Japanese yen against the USD.