After the Federal Reserve, it is now the turn of the Bank of Japan and the Bank of England. Both institutions refrained from changing the parameters of their monetary policy. The former did not surprise the market. The main rate remained at 0.25 percent. Meanwhile, the voting in the Bank of England was 8 to 1, meaning that only Swati Dhingra opted for a reduction. The USD/JPY pair is slightly lower and the GBP/USD is higher, but it should be noted that this is partly due to the weak US dollar.
The Bank of Japan’s statement indicated that it intends to maintain its hawkish tone and continue raising interest rates. This will support the yen and cause it to gradually strengthen, which is largely tied to the reduction of global “carry trade” transactions. The bank’s stance is based on positive economic prospects. Growth above potential is expected in the coming quarters. Consumer expenditures and inflation expectations are expected to improve. A rise in the CPI is widely anticipated, which undoubtedly provides the Bank of Japan with arguments for further action. Perhaps the institution wants to wait a bit longer and believes that the market remembers the events of early August, when there was above-average volatility, a strengthening of the yen, and drastic drops in the Nikkei225 index. Based on the statement, we can assume that the Bank of Japan has such plans, but its forward guidance is no longer as clear as it was in July, for instance. The market is wondering how significant the rate increases can be. If it turns out to be very limited, the yen’s appreciation potential may dry up at some point.
Yesterday, the Monetary Policy Committee members voted eight to one to leave the main rate at the current level of 5 percent. It was noted that inflation has been and still is a factor of uncertainty. This was confirmed by the data for this week (core CPI y/y 3.6 percent and 0.4 percent m/m). The Bank of England also remained somewhat hawkish in its language, in line with market expectations that the institution will be cautious in its actions. Only Swati Dhingra voted for another interest rate cut, confirming her affiliation with the group of monetary “doves”. She had opted for a reduction at each of the last five meetings and was the only opponent of the last interest rate hike in August of last year. I believe that the Bank of England will continue the initiated cycle of monetary easing, but it will be interspersed with pauses, in order to give the institution more certainty about the progress of its fight against inflation.
The trend for USD/JPY (downward) and GBP/USD (upward) is clear and largely due to the divergent actions of individual central banks. The divergence between the Fed and the Bank of Japan is, of course, greater than the gap between the Bank of England and the Federal Reserve. I assume that in the medium term, USD/JPY has a chance to test the level of around 137.50 and GBP/USD 1.3450.
Łukasz Zembik, Oanda TMS Brokers.
Source: https://managerplus.pl/bank-japonii-i-bank-anglii-utrzymuja-stopy-procentowe-bez-zmian-jen-i-funt-reaguja-na-decyzje-89241
