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BOC, BOJ Rate Decisions This Week

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The consensus among analysts is that the BOC will raise rates another 75bps, leaving the target rate at 4.0%. Lately, Canada has been “leading” the Fed since its meetings are scheduled before its southern neighbor’s. Since both countries are facing similar situations, what the BOC does is often interpreted as a little foreshadowing of what to expect out of the Fed. Therefore, if the BOC doesn’t deliver on expectations, it could shake confidence in the consensus that the Fed will also raise rates by 75bps.

Canadian economic data has been doing relatively well over the last couple of weeks, which is seen supporting a strong move by the BOC. But there just recently was a fly in the ointment: US flash manufacturing PMIs fell into technical contraction this month. Canada doesn’t have a comparable flash reading, meaning that the situation there could be similar, but it just isn’t known.

Canada first to pivot?

Another difference is that Canada has had core inflation slowly falling unlike the US, but still above expectations. That has raised expectations that even though the BOC is expected to hike, it will do so “dovishly”. That is, after the rate hike, Governor Macklem will tone down expectations of further aggressive hikes during his post-rate decision.

The BOC releases the monetary policy report (MPR) at the same time as the rate decision, and that’s likely to be poured over to find any clues about when the “pivot” will happen. If the bank lowers its economic projections, then that is likely to be taken as a sign that the next rate hike won’t be as aggressive. Or that the BOC might even pause in December.

How long can the BOJ stay put?

Despite all that’s been happening with the yen lately, the BOJ is expected to keep monetary policy unchanged when it meets later in the week. Inflation has been rising in Japan, but not enough to shake the banks’ extreme easing position.

But that doesn’t mean that Kuroda couldn’t influence the market in his extensive press conference following the meeting. As the yen has weakened over the last several months, calls have risen for the BOJ to do something. There have been at least two interventions so far to stop the slide in the currency. Although it’s the BOJ who does the intervention, it’s at the direction of the Ministry of Finance, which has allowed the central bank to remain aloof from the currency situation.

What can be done

The BOJ is currently applying a series of easing tools, from negative rates, to yield curve control to buying bonds. Although it could reverse course on any of those, should the BOJ decide to take measures, it most likely would come with first removing yield curve controls, since they are the least orthodox policy and would likely be interpreted as the least change in policy.

However, it’s not likely that will be decided at this meeting. But it could be something that Kuroda hints at during the press conference that could finally move the yen in a more permanent direction. Otherwise, smaller interventions might be the course, which would only increase speculation of coordinated action in the future.

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