Thoughts

March 15, 2024 | 13:45

BoJ to Tighten; BoE to Signal a June Cut

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

One by one, the major central banks that have met so far this year have said “Pass” when it comes to offering up any changes to policy. Most lean in one direction, but just need an extra push or boost of confidence.

And after countless (countless!) pushes, the Bank of Japan, after what seems like years, is finally ready to end its negative interest rate policy. There has been growing support within the nine-member Board: they’ve been waiting for inflation to rise and it has; in fact, it peaked in early 2023. Now wages are reacting. The demands of Rengo, the largest union, for the biggest wage increase in over three decades, have been met by some of the largest corporations. And, the economy managed to avoid a recession last year. Plus, Nikkei and Jiji have already leaked out a move. At a minimum, rates will rise to zero and yield curve control will end. It will be interesting to see how Governor Ueda handles the questions, given that he said earlier this month that the Bank was “not yet in a position to foresee the achievement of a sustainable and stable inflation target”. At this point, it is all about credibility, and what remains of it will be lost if the BoJ waits. It is time.

Currency comment from Global FX Strategist Stephen Gallo: Investor disappointment with the BoJ’s normalization pace has put downward pressure on the yen. Though a policy change is all but guaranteed, there is a high bar for the BoJ to surprise investors enough to cause a material JPY appreciation. The JPY’s carry will likely remain unfavourable even after the first few policy adjustments. This is not to say that surprise risk for the BoJ is zero, and there is a scenario which sees USDJPY undergo a quick move to ¥145. However, the baseline foresees USDJPY settling in a near-term range of ¥148-to-¥151.

Then there is the Bank of England. Of its nine members, six were content with doing nothing at the last meeting in February, two have been itching to hike since November, and one wanted to cut (and will vote that way again in March). True, the Bank turned more dovish then, but policymakers echoed the words used at other banks: they want to be “more confident” that price pressures are cooling and see more evidence that inflation is returning to target. Plus, services CPI remains “persistent”.

But as far as monetary policy goes, Governor Bailey put it simply: “the key question has moved from ‘How restrictive do we need to be?’ to ‘How long do we need to maintain this position for?’”. Since the February meeting, private sector surveys showed wage pressures easing, food prices cooling, and retail sales hurt by bad weather. Official data showed that the economy rose 0.2% in January (after finishing 2023 in a technical recession), but is still contracting on a 3-month moving average basis. Employment growth has eased, job vacancies are at a 32-month low, and wage growth cooled to a 1½-year low of 6.1%. Along with some fiscal support from the Spring Budget (cut to national insurance contributions), the MPC is likely becoming more confident that cutting rates around mid-year would be the right thing to do. Not wanting to be rushed, the BoE may wait until the June meeting (BMO had been assuming May), even though there will not be a MPR at the time. The June meeting will be Deputy Governor Ben Broadbent’s final one, and he may wish to make one final impression before handing the reins to the OECD’s Clare Lombardelli on July 1.