Dear Investors,
T.RowePrice – Japan Monetary Policy Must Update and ECB higher as never in 22 years
Interest rates high as never in 22 years
“The ECB monetary policy raised its key deposit rate by a quarter-point to 3.5% – the highest level in 22 years.”
“ECB President Christine Lagarde said after the meeting that policymakers “still have ground to cover” and that they would probably tighten borrowing costs again in July, unless there was a “material change in the baseline outlook.”
“The ECB also raised its forecasts for headline and core inflation across the three-year time horizon, strengthening the case for continued monetary tightening.”
“The central bank also pared its estimates for economic growth about monetary policy.”
“As part of an effort to shrink its balance sheet, the ECB confirmed that it would stop reinvesting the proceeds of its asset purchase program from July.”
Japan monetary policy
“The markets’ rally to their highest levels in over three decades was supported by the BOJ decision to leave its ultra-loose monetary policy unchanged, which had been widely anticipated.”
“Stronger-than-expected Japanese export and machinery order data also boosted sentiment.”
“Investors exercised some caution, however, after the U.S. Federal Reserve refrained from raising rates but hinted at more hikes to come.”
BOJ leaves ultra-loose monetary policy unchanged
“At its June meeting, the Bank of Japan left its ultra-loose monetary policy settings unchanged, meeting investor expectations.”
“BOJ Governor Kazuo Ueda hinted that when it comes to its YCC program, a certain degree of surprise may be unavoidable, in order to deal with the changing economic environment.”
“Building inflationary pressure has heaped pressure on the BoJ to pivot from its easing stance.”
“BOJ stuck to its projection that the year-on-year rate of increase in the CPI is likely to decelerate toward the middle of fiscal 2023.”
“Ueda said that, while there is very high uncertainty on the economic and price outlook, the central bank expects consumer inflation to slow as cost-push factors dissipate, although inflation is still in the early stages of moderating.”
BlackRock – Are Central Banks underappreciating the existing damage from hikes?
“Sticky inflation looks to compel developed market (DM) central banks to crank policy rates higher – and keep policy tight for longer. The FED paused last week but pointed to more hikes on the way.”
“The ECB raised rates and made clear it wasn’t done. Others hiked after earlier pauses.”
Central banks are underappreciating the current situation?
“We think the Fed and ECB appear to be underappreciating the existing damage from hikes.”
“The FED revised its growth forecast up based on historically low unemployment. The FED may be relying on a job and growth relationship that has broken, in our view.”
Monetary policy – market pricing
“The market pricing of hikes by the ECB and the BOE have become more extreme than our view: Pricing shows rates for both staying higher for much longer than the Fed while inflation stays elevated.”
Short-term bond yields jumped
“Short-term bond yields jumped in the euro area and UK on market expectations for further rate hikes after the ECB’s signal and UK data showed surprisingly strong wages.”
“Two-year Treasury yields also rose as the Fed signaled more rate hikes even after a pause.”
“These events confirm the ongoing tightening bias of central banks facing sticky inflation. DM stocks hit new 14-month highs, with gains broadening beyond the mega cap tech shares that have been the big winners this year.”
Blackrock view – monetary policy
“The ultimate economic damage depends on how far central banks go to get inflation down.”
“The fed paused rates in June but signaled further hikes ahead.” The ECB hiked again in June.”
“We see the ECB going full steam ahead with rate hikes to get inflation to target – regardless of the damage that entails.”
“High inflation has sparked cost-of-living crises, putting pressure on central banks to tame inflation with whatever it takes.”
“Yet there has been little debate about the damage to growth and jobs. We think the “politics of inflation” narrative is on the cusp of changing.”
“The Fed’s rapid rate hikes will stop without inflation being back on track to return fully to 2% targets, in our view. We think we are going to be living with inflation. We do see inflation cooling as spending patterns normalize and energy prices relent – but we see it persisting above policy targets in coming years.”
