Trouble down under
On the face of it, there was not much change in July. No rate hikes are expected until actual inflation is within the 2-3% range and supportive monetary conditions (low rates etc) are to be maintained in order to support a return to full employment and for inflation to be consistent with this target. The labor market is still, like June's meeting, not expected to be tight enough to spur higher age growth (and therefore inflation with it) until 2024. The economic recovery is still regarded as stronger than 'earlier expected and is forecast to continue. The three-year yield target remained the same keeping to the April 2024 bond as its 3-year yield target instead of pushing it further down the line to the November 2024 bond. Bond purchases were extended until mid-November, but reduced by $1 billion a week. So, a more confident meeting on balance from the RBA.
The takeaway
The central scenario remains that the condition for a lift in the cash rate will not be met until 2024". The data the RBA want to see is inflation in the 2-3% range and spurred on by wages growth that exceeds 3%. A temporary spike in inflation is not stated to be enough to move the RBA for now.
COVID-19 resurgence
Headwinds now remain for the Australian dollar right now as the nation struggles to manage the rising delta variant. Australia's New South Wales Premier says that he will tighten COVID-19 lockdown rules in the worst impacted areas of Sydney. The sharp rise of the Delta variant has resulted in a number of strict lockdowns in Australia and that looks set to continue. The RBA is meeting next week and Westpac sees that the RBA may now increase their tapering levels to $6 billion per week.
This is especially the case with the recent dip in Iron ore prices this last week.
European Central Bank, President Christine Lagarde, -0.50%, Meets September
Dovish tilt in the context.
The meeting on July 23 kept interest rates kept unchanged and both the size of the bond purchases (PEPP) were unchanged at €1.85 trillion and AP purchases are continuing at the speed of €20 billion a month. Going into the ECB meeting there were expectations that, after the ECB's strategic review, the ECB would be revealing a more dovish hand. This was hinted at in the run-up to the meeting by Christine Lagarde who said that the PEPP could 'change' into something else. However, on Friday, July 16 a sources report said that, due to disagreement, the bond purchases would be left unchanged/not mentioned until September's meeting. This would have marked a shift from the June 10th meeting where sources piece revealed that three ECB board members were in favor of bond tapering.
'Marginal' disagreement
Christine Lagarde noted in the press conference that there was some 'marginal disagreement'.It was not surprising as within the GC are fiscal conservatives like Germany and the more liberally minded Italians, so getting an agreement was always going to be tough. Germany's Weidmann & Belgium's Wunsch opposed the ECB's new guidance according to Bloomberg/sources as it signaled a commitment to lower rates for longer. In addition to these two members, sources note that several more voiced objections due to the length of commitment and a lack of clarity. The ECB will accept an overshoot of inflation which they expect to be temporarily higher. Remember, they now have a symmetric 2% target. Some members wanted to aim for 'at least 2% inflation, not just 2% inflation.
The takeaway?
The ECB did not deny the dovish expectations, only disappointed with a lack of an action at their last meeting. It looks like setting up for a lower for longer message in September, but with internal disagreement. The path of least resistance is to see it as euro bearish until proven otherwise.
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