‘What if the Bank of Japan blinks?’

Until last week, trade in the yen reflected an expectation that while the US Federal Reserve may be forced into further monetary policy tightening by high inflation, the January policy meeting of the Bank of Japan was unlikely to rock the boat with any significant verbal or practical change in stance. This helped push the Japanese currency to its weakest point against the dollar in five years.

However, recent days have dented that certainty. Analysts at JPMorgan framed a Friday note on the yen with the question “what if the BoJ blinks?”: trading in the yen, which rose strongly on Thursday and Friday, is an expression of the same speculation that this week’s meeting may yet hint at a critical shift in thinking, or a potential loosening of the BoJ’s yield curve control regime.

Underlying inflation in Japan is creeping higher, with a significant December jump in wholesale prices the latest signal that even Japan is not immune to the global trend.

Analysts at Morgan Stanley now guess that the BoJ’s existing outlook, which judges the risk to prices are “skewed to the downside” may now be revised to suggest that the risks are “balanced”.

Investors should still expect, said Morgan Stanley, BoJ governor Haruhiko Kuroda to emphasise that reaching the 2 per cent inflation target in a sustainable manner is still some way off, and the accommodative stance should be maintained for now.

Other analysts highlight the risks of a deterioration in the Japanese economy as the country braces itself for the current wave of Omicron infections to intensify among a population where almost none have received their third booster vaccination shot.

Staff absences and the likely imposition of restrictions on restaurants, bars and other businesses could place limits on broad economic growth in the current quarter, said analysts at Capital Economics. Leo Lewis

Will UK inflation data prompt another rate increase?

Data releases this week will offer the last official signals about the strength of the UK labour market — and the pace of consumer price inflation — before the Bank of England’s monetary policy announcement on February 3. The figures will be assessed by the members of the committee when they decide whether to lift interest rates once again after a rise in December to 0.25 per cent.

Sandra Horsfield, economist at Investec, expects the labour market to remain tight and inflation to show only a marginal dip to an annual 5 per cent for December, after it reached a decade-high of 5.1 per cent in the previous month. As a result, Horsfield expects a further rate rise to 0.5 per cent at the next MPC meeting.

Food price inflation is projected to have continued rising in December, due to rising commodity costs during that time. However, clothing and footwear price inflation are likely to have fallen — largely because of their higher-than-usual prices in December last year.

After largely stable inflation readings in December and January, Samuel Tombs, economist at Pantheon Macroeconomics, expects UK headline inflation to peak at 6 per cent in April when energy regulator Ofgem will increase its default energy tariff price cap. That would be the highest rate in 30 years and three times the BoE target of 2 per cent.

However, Tombs forecast that the headline rate would ease to about 4 per cent by the end of the year, as supply chain disruptions lessen and demand shifts back from goods to services. Accordingly, “the MPC needn’t panic,” said Tombs, who expects two 0.25 percentage point rate rises this year, rather than the four anticipated more broadly by investors. Valentina Romei

Will ECB minutes shed light on stimulus thinking?

The European Central Bank will on Thursday publish the minutes of its last policy meeting, providing an insight in to how the debate is shaping up on the future path of inflation and whether its stimulus policies should be withdrawn faster.

Christine Lagarde, ECB president, announced after last month’s meeting that its governing council had agreed on a “step-by-step reduction in the pace of asset purchases” in 2022 while judging that “monetary accommodation is still needed” for inflation to hit its medium-term target.

The ECB’s stance contrasts with other major central banks, such as the US Federal Reserve and Bank of England, which are preparing to completely stop buying bonds and to start raising rates in response to inflation, which has shot up to multi-decade highs.

Since the ECB meeting, eurozone inflation hit a new record high of 5 per cent in December, prompting some council members to warn that if prices keep rising faster than its 2 per cent target for longer than expected it will require a more drastic policy shift.

Isabel Schnabel, an ECB executive board member, gave voice to these fears a week ago by saying the planned transition away from fossil fuels to a greener low-carbon economy “poses measurable upside risks to our baseline projection of inflation over the medium term”.

Last month’s decision was opposed by some of the more “hawkish” council members, such as Jens Weidmann, the now departed head of Germany’s central bank, who argued the ECB was overcommitting to maintain its stimulus too long given upside risks to inflation.

The minutes will shed more light on how widely this view was shared. “The bottom line is that quite a few council members seem to be prepared to change the ECB’s course, but for the time being they want to wait and see how the pandemic, inflation and the economy develop,” said Michael Schubert, an economist at Commerzbank. Martin Arnold

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