Central Banks Meetings

Central Banks Meetings

Central Banks Meetings in Fundamental Analysis

When the economic authorities speak, the financial markets find it inappropriate to object. A country’s economy is the foundation which a civilised society is built upon. It has a complex architecture that stands on the pillars of production, employment, and consumption.

Like a living organism, it circulates the society’s financial lifeline through its veins and requires continuous care and maintenance to function healthily. As the heart of this system, each economy’s central bank assumes responsibility for the mission of securing the system’s long-term survival.

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What are Central Bank Meetings?

Central Bank Meetings are periodic gatherings of a central bank’s monetary policy committee (MPC). The members evaluate the effectiveness of the existing monetary policies for the current economic climate.

As the top monetary authority in the country, the central bank is responsible for creating a healthy economic environment to facilitate sustainable growth. The MPC’s task is to create a monetary policy that would guide the central bank to accomplish this primary objective.

Major central banks like the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) have regular meetings to stay on top of the economy and take measures if needed.

The MPC members attend the central bank meetings to assess the national economic conditions, set the official interest rates, and decide on other economic interventions. The actions taken in the central bank meetings are guided by monetary policy goals, which specify targets for the economic indicators considered by the MPC to best measure the performance of the national economy. These indicators are usually the Gross Domestic Product (GDP), the inflation rate, and the unemployment rate. If the figures in these indicators are falling short of the mark, in either a positive or negative direction, the central bank may decide to use the tools at its disposal to steer the economy back on track.

Economic interventions by central banks aim to stimulate or slow down economic growth by modifying the money supply in circulation. Intervention methods include interest rate decisions, open market operations, and minimum reserve requirements.

Each tool causes a significant impact on the value of the national currency by making it more or less available. Any course corrections are decided upon during the central bank meetings and then shared with the public with an official announcement.

Customarily, the president of the central bank holds a press conference at the end of each meeting. The purpose is to summarise the bank’s current outlook on the economy and explain the reasoning behind its chosen actions. Moreover, the central bank meeting minutes are released, which reveal the discussions, perspectives, and votes of the individual committee members.

Central Bank Meetings as Economic Indicators

The central bank meetings are lagging economic indicators, as the monetary policy decisions reflect the bank’s outlook on the future while the economy is evaluated in retrospect.

The meetings also set a tone  for the financial markets. Investors trust the central banks as a key source of information for their respective economies and seek to position themselves advantageously before the central bank expectations are realised.

The Agenda of Central Bank Meetings

The operational objective of a central bank is to maintain price stability during economic growth, which is mainly driven by consumer spending. When people spend more, the rising demand boosts prices and adds value to the economy; when spending is low, the accumulating supply brings prices down.

The pace of change in the consumer prices of goods and services is measured using the inflation rate. While an inflation level around 4% is considered healthy for sustainable economic growth, too high or too low of an inflation rate can lead to major problems.

Central bank meetings assess the probability of encountering such problems. These financial experts can then take steps to nudge it towards the desired monetary policy goals.

How central banks control inflation?

When the inflation rate diverges from the target figure, central banks can use various economic intervention measures. These tools modify the availability of money supply influencing consumption activity to be stimulated or slowed:

  • Interest Rates: Increasing or decreasing the commission charged when lending the relevant currency to the domestic banks and financial institutions makes it more or less expensive.
  • Open Market Operations: Selling or buying governmental bonds and commercial debts injects cash into the economy or sends cash out of it.
  • Minimum Reserve Requirements: Raising or reducing the amount retail banks must reserve for emergencies limits the resources they can use to offer products to their customers.

Central banks usually prefer to use interest rates as the first step to shift the economy. Rate changes create a powerful top-down domino effect which influences the individual decisions of various entities. This is a less heavy-handed option than initiating proactive open market operations. Interest rate adjustments are also less intrusive than enforcing a change in the minimum reserve requirements.

Why Interest Rates matter?

Central banks determine the baseline value of the national currency using interest rates. Making a currency more or less expensive changes its accessibility and purchasing power. As a result, the currency strength in the money market changes and causes linked currency pairs to rise or fall. Moreover, it starts a cascade of repricing for the assets related to the country.

The Effect of Central Bank Decisions on the Economy

When the country adopts an expansionary economic policy, the decisions taken in the central bank meetings will be dovish with an aim to stimulate growth. To stimulate consumption, the bank can:

  • Cut the interest rate, making loans cheaper and more attractive
  • Increase asset purchases, injecting ready-to-use cash into economy
  • Reduce reserve requirements, allowing banks to use more reserve capital in operations

As a result of increased consumption, private and commercial loans become more accessible. Companies are encouraged to expand by funding business expansion and increasing their workforce. Higher production and lower unemployment drive consumer confidence higher. People then spend more. Once demand rises, and prices typically increase.

However, if the rising cost of living is not matched by a jump in the income and wages of the citizens, the economy can enter a deadlock. Employees will demand higher salaries, which can eventually render simultaneous operational and workforce expansion unsustainable. Companies may start laying off their employees, causing the unemployment rate to rise while prices are still high.

To prevent an economic crisis, the central bank can adopt a contractionary economic policy to pressure price inflation down to a manageable level with hawkish decisions such as:

  • Hiking interest rates, making loans more expensive and less attractive
  • Increasing asset sales, moving cash from economy by offering non-circulating investments
  • Increasing reserve requirements, reducing the capital the banks can use for products

Subsequently, banks pay more when borrowing from the central bank or each other and shift the added expense to consumer products. Individuals and companies are discouraged from taking loans, which reduces spending. Businesses end up with excess supply and need to cut their prices to sell off their inventories.

How to Trade with Central Bank Meetings?

Central bank meetings of prominent decision-makers like the Fed’s Federal Open Market Committee (FOMC), the ECB’s Governing Council, and the BoE’s Monetary Policy Committee (MPC) are widely anticipated in the financial markets. Their interest rate decisions, 8 times a year, affect some of the most traded currencies in the world –the U.S. Dollar (USD), the Euro (EUR), and the British Pound Sterling (GBP)– as well as the stocks, indices, and commodities traded in their local exchanges.

Interest Rate Decision

Rumours about the most probable outcomes begin a week before the central bank meeting. News traders and long-term investors start taking positions at the beginning of the meeting week, indicating their expectations through the price trends. At the end of the meeting, the central bank announces its decisions, and the market turmoil usually breaks loose with extreme volatility in the related assets.

Under normal circumstances, the decisions made in the central bank meetings evoke predictably volatile price movements that are congruent with the changes in the future profitability of the assets.

Example 1: A Fed meeting (FOMC meeting) concludes with an interest rate cut, as forecasted. USD will lose value in Forex currency pairs like EUR/USD and USD/JPY, and the U.S. Treasury Note yields will join the downtrend. Investors who exit their positions on USD and securities will focus on equities. U.S. stocks like Facebook (NSDQ: FB) and Walmart (NYSE: WMT) will gain value, along with major indices like Dow Jones 30 (INDEXDJX: .DJI), and USD-traded commodities like Gold and WTI Crude Oil.

Example 2: An ECB meeting concludes with an interest rate hike, as expected. EUR will gain across FX pairs like EUR/USD and EUR/GBP, while the government bonds of the E.U. countries will offer higher yields. Contrarily, European stocks and indices will deteriorate, causing major equities like German Deutsche Bank shares (ETR: DBK) and French CAC 40 index futures (INDEXEURO: PX1) to drop.

However, unexpected reactions can occur if the market sentiment is pressurised by abnormal situations such as deteriorating economic conditions, economic crises, wars, or global issues like pandemics.

In such cases, investors would expect the central banks to implement measures to relieve the economy against adversity, and the market reaction will depend on how much the central bank’s decisions satisfy the investors’ expectations.

Press Conference and Meeting Minutes

Interest rate decisions are not the only factor which determine market behaviour. Major players like financial institutions and large-scale investors base their positions on how the economy will develop in the long run. To gain insight on this, institutional investors tune into the central bank president’s press conference after the meeting and analyse the central bank meeting minutes.

For example, in the Fed meeting minutes, the investors analyse the discussions held among the FOMC members to understand how the managers of the economy view the current and future conditions.

They try to read between the lines to see which members supported or resisted the decision made in the meeting with hawkish or dovish perspectives. Such details provide insights about what the central bank will consider in their upcoming meetings and what kind of decisions this might lead to.

Once the information is digested, investors start taking their positions according to the decisions they expect the central bank to make in the future. As a result, the well-known extreme volatility after the central bank meetings occurs.

Key Central Bank Meetings Around the World

U.S. Federal Reserve (Fed) – Federal Open Market Committee (FOMC)

  • Region: North America
  • Date of release: 8 times a year
  • Affected Assets: USD; U.S. stocks and bonds; Dow Jones, S&P 500, NASDAQ 100; USD-traded commodities

European Central Bank (ECB) – Governing Council

  • Region: Europe
  • Date of release: Monthly
  • Affected Assets: EUR; European stocks; DAX 30, CAC 40; government bonds of EU-members

Bank of England (BoE) – Monetary Policy Committee (MPC)

  • Region: Europe
  • Date of release: Monthly
  • Affected Assets: GBP, EUR; British stocks; FTSE 100; UK Gilts

Bank of Canada (BoC) – Governing Council

  • Region: North America
  • Schedule: 8 times a year
  • Affected Assets: CAD; Canadian stocks; S&P/TSX; Canada Marketable Bonds; Crude Oil

Bank of Japan (BoJ) – Policy Board

  • Region: Asia
  • Schedule: Twice per month
  • Affected Assets: JPY; Japanese stocks; Nikkei 225; Japan government bonds

People’s Bank of China (PBOC) – Monetary Policy Department

  • Region: Asia
  • Schedule: Quarterly
  • Affected Assets: CNY, AUD, NZD; Chinese stocks; China A50; Chinese Government Bonds

Reserve Bank of Australia (RBA) – Reserve Bank Board

  • Region: Oceania, Asia
  • Schedule: Monthly (except January)
  • Affected Assets: AUD, NZD; Australian and New Zealand stocks and bonds; ASX 200 index

Why Trade the Outcomes of Central Bank Meetings with AvaTrade?

Central bank meetings are among the most impactful market events. The decisions of the central banks can cause colossal volatility in a wide range of assets and create numerous day trading opportunities with substantial return and risk potential.

With the assistance of AvaTrade’s expertise, you can easily prepare your portfolio to trade the central bank meetings, choose the right assets, analyse the markets, and manage your risk with confidence.

  • When is the next Central Bank Meeting? Check the central bank meetings schedule directly on AvaTrade’s trading platforms or website and learn the forecasts.
  • What should I trade with Central Bank Meetings? Volatility can be moderated by the relevance of assets; consider American assets for Fed decisions, European assets in ECB announcements, and British assets in BoE meetings.
  • How can I purchase the relevant assets? In AvaTrade, the outstanding CFD trading system allows you to benefit from price changes without binding your capital to purchase a physical asset.
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Central Bank main FAQs

  • Why are central bank meetings important for markets?

    As the lender of last resort for any country, the central bank’s monetary policy can have a massive impact on the flow of money and on open market activities. Because the central bank has oversight and control over the monetary system of a country they can influence inflation, employment, and the stability of the economy. Because the central bank has such great power over the economy and financial stability of the country it oversees any statements made by the members of a central bank can give important clues about the future direction of the economy and characteristics that will directly influence the financial markets

     
  • Which is the most important central bank in the world?

    While it isn’t necessarily the most important central bank, all of the global central banks are important to maintaining financial stability, the most influential central bank is the US Federal Reserve Bank. As the largest economy in the world, and with the US dollar being the world’s reserve currency, any monetary policy in the US has an impact on most of the countries of the world. The two other most influential central banks are the European Central Bank and the People’s Bank of China. Together these three central banks manage the monetary policy of over half the world’s GDP.

     
  • How do the central banks impact the forex markets?

    Central banks are a unique force in forex markets because unlike nearly every other participant they have no profit motive in the market. In addition, while the monetary policy decisions of the central banks can have a dramatic impact on foreign exchange rates, the central banks do not participate directly in the forex markets. By changing the interest rates of a country, or the amount of money in circulation, the central bank often changes the value of the country’s currency as well. Sometimes this is intentional, because typically a weaker currency is good for international trade, but sometimes it is an unintended side-effect of the central banks efforts too promote economic growth and price stability.

     

Each central bank meeting offers an exciting occasion to enjoy and celebrate the trading opportunities in the financial markets. Now that you know how central banks make decisions and how their decisions affect your favourite assets, check out when the next meeting is scheduled and start trading with confidence!