Thoughts

July 26, 2024 | 13:07

Rock, Paper, Scissors

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)

Don’t go on vacation next week! So much going on, between the BoJ and the BoE, and inflation data that could push the RBA to hike rates....

The BoE will make its policy announcement on August 1 and yours truly will be on the edge of her seat. One can toss a coin on this important decision by the Bank. Indeed, even here at BMO, there are differing views. The MPC has been slowly but surely leaning more dovish this year: Swati Dhingra had been the sole policymaker voting for a cut, but Dave Ramsden joined her in May and June. It was also noteworthy that for the rest of the MPC, the June decision was “finely balanced”. However, still-sticky core and services inflation rates and surprisingly strong economic activity (real GDP has grown over 2½ in the first half of 2024) will prompt the question “Why are we even thinking about rate cuts?” And yes, there were special factors behind some of the inflation stickiness, but the Bank may want to see confirmation that the stubborness is temporary and, hence, hold off until September before moving.

Our Laurence Mutkin, Director & Head, EMEA Rates Strategy, believes that the BoE has become less concerned about inflation’s persistence. And, with the new government’s fiscal discipline, the job market will become less tight; thus, the BoE will ease on August 1.

Whatever the outcome, it will be a very close call. Of the nine policymakers, there are two doves, and three or maybe four (Chief Economist Huw Pill) who would prefer to hold. That leaves three policymakers to swing the vote, including Governor Bailey who has sounded more dovish of late (although he has been uncharacteriscally quiet recently, in part because of the election). Claire Lombardelli will be voting for the first time and will likely vote with the boss. And, Sarah Breeden is more dovish leaning. In short: if the three move to the cut camp, that becomes a majority. Again… a very close call.

The BoJ will also make its policy decision on July 31, and we continue to expect some changes, including a possible rate hike from its still-ultra-low 0%-to-0.1% target. Back in March, the BoJ took a big step forward when it ended its negative rate policy and axed yield curve control. However, the JPY sold off as the move was watered down with the decision to maintain its monthly JGB purchases, that it would stay “nimble”, and that “accommodative financial conditions will be maintained for the time being”. The currency didn’t react when the Bank announced in its June statement that a “detailed plan” to cut its bond purchases “during the next one to two years or so” would be unveiled at the July meeting. We will see whether it speeds up that timeframe given that the Board is worried about hurting already-weak consumer spending, and as the JPY has found a new lease on life, sparked by BoJ (hike) and Fed (cut) expectations.

Key data to watch:

Euro Area inflation for July… a key input for the ECB’s September decision
Australia inflation for Q2 and June… may prompt the RBA to actually hike rates on August 6