Central Banks' Inflation Targeting and Policy Rates Analysis
Central banks' approach to inflation targeting and policy rates, including interest rates, inflation rates, and exchange rates, along with selected G20 latest and expected policy rates. Explore how central banks set inflation targets and adjust policy rates accordingly. Analyze the impact of inflation on jobs, unemployment, and population changes.
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KBank on econ, rates and FX May 2016 by Kobsidthi Silpachai, CFA Pareena Phuangsiri Nattariya Wittayatanaseth Anchali Singh Capital Markets Research 1
What is interest rates, inflation rates, exchange rates? Interest rates is the appreciation rate of money with respect to time Inflation rates is the depreciation rate of money with respect to time .or inflation is the EXCHANGE RATE between goods & service vs. money Exchange rates is the price of one country s money versus another country s money 3
Selected G20 latest and expected policy rates 16 14.25 13.50 14 11.00 12 9.55 10 8.00 7.50 8 6.75 6.55 6.50 6.30 6 4.35 4.15 4.05 3.77 4 1.75 1.55 1.50 1.30 2 0.85 0.55 0.50 0.50 0.50 0.50 -0.05 -0.10 0.00 0.00 0 -2 AU BZ CA CH IN ID JN MX RU SK TU ECB UK US latest policy rate 2016 end est. 4
Central banks KPI.inflation targetingmissing the mark? latest inflation inflation target 4.0% 4.0% 3.5% 3.5% inflation ranges 3.0% 3.0% 3.2% 2.5% 2.5% 2.0% 2.0% 2.1% 1.5% 1.5% 1.7% 1.6% 1.0% 1.0% 1.3% 0.5% 0.5% 1.0% 0.8% 0.6% 0.0% 0.0% 0.4% 0.3% 0.2% -0.5% -0.5% -0.1% -0.2% -0.4% -1.0% -1.0% -0.9% -1.5% -1.5% -1.1% policy rates -2.0% -2.0% -2.5% -2.5% -3.0% -3.0% -3.5% -3.5% -3.3% -4.0% -4.0% Norway Hungary Switzerland Australia Eurozone UK US South Korea New Zealand Poland Czech Japan Canada Sweden Israel Iceland Romania 5
Central banks KPI.inflation targetingmissing the mark? policy rate 7.0% 7.0% 6.0% 6.0% latest inflation data point inflation range inflation target 5.0% 5.0% 5.0% 4.0% 4.0% 4.0% 3.6% 4.0% 4.0% 4.0% 3.5% 3.0% 3.0% 3.0% 3.0% 3.0% 2.5% 2.5% 2.3% 2.1% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 1.3% 1.1% 1.0% 1.0% 1.0% 1.0% 0.1% 0.0% 0.0% -0.1% -0.2% -1.0% -1.0% -2.0% -2.0% Australia China Eurozone Indonesia Japan Philippines South Korea THAILAND US 6
Jobs, unemployment...one side of the inflation dilemma 106 105 104 102 100 100 98 96 95 94 92 90 08 09 10 11 12 13 14 15 16 17 US non-farm payroll, indexed, Sept 2008 = 100 EZ, employed persons JP 7
Population and inflation change in JP inflation 130 110 14.0% 100 125 y = 6.0414x - 0.0034 R2 = 0.7189 12.0% 90 120 10.0% 80 115 70 8.0% 110 60 6.0% 50 105 4.0% 40 100 2.0% 30 -0.00144551 0.0% 95 20 -0.4 % -0.2 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 90 10 -2.0% % 60 64 68 72 76 80 84 88 92 96 00 04 08 12 -4.0% change in JP population JP population, mn JP CPI, 2010 = 100 base 8
Changing expectations of Fed Funds futures 1.50 1.29 1.25 1.10 0.96 1.00 0.88 0.82 0.71 0.70 0.69 0.66 0.64 0.75 0.63 0.54 0.54 0.53 0.44 0.40 0.50 0.25 0.00 2Q16 3Q16 4Q16 1Q17 1year ago 6mth ago 2mth ago yield %, now 9
Reforms, reforms, reforms = tepid domestic demand = low CPI? 101% 8 7 99% 6 5 97% 4 95% 3 2 93% 1 91% 0 Lower domestic demand = lower demand pull inflation -1 89% -2 87% -3 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 (C+G+I)/Y TH CPI % YoY, right 11
Thai economic structure will require a competitive baht 100% 12% 99% 10% 8% 98% 97% 8% 96% 6% 95% 94% 4% 93% 2% 92% 0% 91% 90% -2% 90% 89% 88% -4% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 (C + G + I) / Y, left (X - M) / Y, right 12
USD, #1 reserve currency = Fed is worlds central bank, esp. Asia Other 6.8% GBP 4.9% World FX reserve currency market share CHF 0.3% JPY 4.1% EUR 19.9% USD 64.1% 13
Who says carry trades dont matter 3.5 28 29 30 31 32 33 34 35 36 37 38 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 08 09 10 11 12 13 14 15 16 17 18 -1.0 -1.5 -2.0 TH 1yr - US 1yr LIBOR, % implied USDTHB, right, inverted 14
BOT bonds, a major USD/THB speculative channel 300 28.0 29.0 30.0 31.0 32.0 33.0 34.0 35.0 36.0 37.0 250 200 150 100 50 - Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 foreign holdings of BOT paper, THB bn USD/THB right, inverted 15
Thai bonds risk vs. reward ratiosgetting rich bps 70 60 50 40 30 20 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Govt: yield / duration average + 1sd - 1sd 16
Thai fixed income relative to Thai inflation TBMA total return, rebased to Jan 2000 280 143.87 , 255.20 260 240 y = 2.3294x - 121.18 R2 = 0.9127 220 200 180 160 140 120 100 100 110 120 130 140 150 TH CPI, rebased to Jan 2000 17
Implied forwards suggest markets are unsure of direction % % Thai swaps implied curve shifts Thai govt bond implied curve shifts 2.43 2.50 2.50 2.35 2.30 2.24 2.17 2.25 2.25 2.12 2.26 2.08 2.08 2.20 2.02 1.97 2.13 1.95 2.00 2.00 2.07 1.88 1.87 1.84 1.97 1.79 1.75 1.72 1.87 1.68 1.68 1.75 1.75 1.64 1.77 23/05/2016 1.57 23/05/2016 next 3 months next 6 months next 12 months 1.67 next 3 months 1.47 1.47 1.47 1.61 1.50 1.50 1.57 next 6 months 1.52 next 12 months 1.47 1.25 1.25 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 tenor, yrs 18 tenor, yrs
The money printing continues for EZ, JP...not US 5,000 4,500 3,7954,478 4,000 3,500 3,448 3,000 2,500 2,000 1,500 1,000 500 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Fed balance sheet, USD bn ECB BOJ 21
When the Fed unwinds its UST holdings, avg maturity = 8.46yrs 450 400 350 300 250 200 150 100 50 0 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 36 37 38 39 40 41 42 43 44 45 46 Fed UST holding by maturity, USD bn 22
Foreign participation in Thai assets helped boost their prices THB bn 650 603 600 550 537 500 450 400 350 300 266 250 200 150 100 76 50 0 -50 -100 -141.7 -150 -200 07 08 09 10 11 12 13 14 15 16 17 TGB, exc. BOT bond BOT bond Thai stocks, est since 1999 23
mm barrels / day Balance Demand Demand: OECD Demand: OECD: Americas Demand: OECD: Europe Demand: OECD: Asia Pacific Demand: Developing Countries Demand: Former Soviet Union Demand: Other Europe Demand: China Supply Supply: OECD Supply: OECD: Americas Supply: OECD: Europe Supply: OECD: Asia Pacific Supply: Developing Countries Supply: Former Soviet Union Supply: Other Europe Supply: China Exports: Former Soviet Union: Net Est. OPEC supply 03-14 1.2 90.2 45.7 23.9 13.0 8.9 29.4 4.4 0.6 10.1 91.4 23.5 19.2 3.8 0.5 12.2 13.5 0.1 4.3 9.1 35.6 06-14 1.5 90.2 45.0 23.8 13.6 7.7 29.8 4.2 0.6 10.6 91.8 23.9 19.9 3.5 0.5 12.2 13.4 0.1 4.3 9.1 35.7 09-14 0.5 92.0 46.0 24.4 13.9 7.7 30.4 4.6 0.6 10.3 92.5 24.1 20.2 3.4 0.5 12.4 13.4 0.1 4.2 8.8 36.1 12-14 1.0 92.8 46.6 24.7 13.6 8.4 29.7 4.9 0.7 10.9 93.9 24.9 20.7 3.7 0.5 12.6 13.5 0.1 4.4 8.6 36.2 03-15 2.2 92.0 46.4 24.2 13.5 8.7 30.0 4.4 0.7 10.4 94.2 25.2 21.0 3.7 0.4 11.6 13.8 0.1 4.3 9.3 37.0 06-15 2.8 92.0 45.4 24.1 13.6 7.7 30.7 4.3 0.6 11.1 94.8 24.9 20.7 3.8 0.4 11.5 13.7 0.1 4.4 9.4 38.0 09-15 1.6 93.9 46.5 24.8 14.1 7.6 31.3 4.6 0.7 10.7 95.5 25.3 21.1 3.7 0.5 11.4 13.6 0.1 4.4 9.0 38.4 12-15 2.0 94.0 46.3 24.4 13.7 8.3 30.8 5.0 0.7 11.1 96.0 25.5 21.2 3.9 0.5 11.5 13.7 0.1 4.4 8.8 38.6 03-16 2.5 93.1 46.6 24.4 13.5 8.6 30.7 4.4 0.7 10.7 95.7 25.2 20.9 3.8 0.5 11.4 13.9 0.1 4.3 9.4 38.6 24
Oil remains influential on inflation expectations, Fed policy 130 2.8 2.6 110 2.4 90 2.2 2.0 70 48.2 1.8 50 1.6 30 1.4 1.53 10 1.2 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Oil futures, USD/bbl, left Fed 5yr inflation compenstion, %, right 25
