BoJ leaves monetary policy unchanged after turbulent week

Good morning,

  • BoJ leaves monetary policy unchanged after turbulent week;
  • BoE minutes may bring more hawkish tone as inflation heads south;
  • MPC voting could provide strong insight into future path of interest rates;
  • Markets expected more hawkish tone from FOMC minutes later.

We have a big day ahead of us in the financial markets and attention is going to be firmly on the central banks, with the Bank of Japan having just announced its latest policy decision and minutes from the recent Bank of England and Federal Reserve meetings to come later.

Japan has really been in the spotlight recently, ever since the BoJ last met and announced an unexpected increase to its bond purchases to 80 trillion yen per year, from 60-70 beforehand. Since then, the country has fallen into recession, forcing Prime Minister Shinzo Abe to delay the next sales tax hike by 18 months to April 2017, and the lower house of parliament has been dissolved – as of 21 November – and new elections called for December. It’s a really rocky time for Japan at the moment and all of this more than likely explains the BoJ’s decision to raise its bond purchases last month.

Given that the BoJ got in there early last month, it was always unlikely that we were going to see further bond purchases announced this morning. I’m also not convinced that the BoJ needs to do any more right now, not with Abe’s commitment to implement more fiscal stimulus measures should they win the election and given how accommodative the central bank already is. Too much is also being made of this technical recession as well, the same happened last time the sales tax was raised, it’s only natural in a low growth economy where the consumer makes up around 60% of GDP.

Shortly after the European open, focus will shift from the BoJ to the BoE, as the minutes from the meeting two weeks ago are released. The BoE has long been seen as one the major central banks most likely to raise interest rates first, with some forecasts at times suggesting it would come as early as the end of this year, although that is largely the fault of Governor Mark Carney who dropped that bombshell earlier this year at the annual Mansion House event.

While the BoE is currently looking more likely to tighten monetary policy than loosen it, I don’t think this will come until the end of next year at the earliest. This is nothing to do with the fact that the economy is cooling because that is perfectly normal, it’s the inflation problem that’s facing many central banks now, with Carney only last week admitting that it’s likely to fall below the BoEs lower boundary of 1% and stay there for a while before returning to the 2% target in three years. Surely the BoE can’t be considering raising rates at a time when the Governor is being forced to write a letter to the Chancellor explaining why inflation has been allowed to fall below the acceptable range.

With that in mind, the minutes could offer a more dovish tone than we have become accustomed to from the BoE, while the two members that have voted for rate hikes at the last three meetings may reconsider their position. Any backtracking from Martin Weale or Ian McCafferty could be the clearest sign to the markets that the first rate hike remains some way off.

Later on this evening we’ll wrap things up on the central bank front with the minutes from the recent Fed meeting. The Fed now looks to be in a much better position than even the BoE to raise interest rates next year but even it has inflation concerns that may force it to delay the first hike a little. The case in the US may not be as bad as it is elsewhere but inflation remains below target. That said, the latest PPI data, released yesterday, may hint at higher prices in the coming months, bringing the inflation rate back towards target and making the Fed’s decision a little more straight forward.

The FTSE is expected to open 10 points higher, the CAC 10 points higher and the DAX 15 points higher.

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