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Upcoming Interest Rate Decisions: BOC and BOJ

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The two remaining major central bank meetings for this week are expected to conclude with no change in monetary policy. But there are particulars from each that could make each event noteworthy.

The global cycle of rate hikes will have to come to an end soon. Until quite recently, the market was pricing in a leveling off of rates through the early months of this year. However, inflation has remained persistent in many countries. Consequently, the market has been adjusting to further hikes before a pause. But, given that context, two major central banks not raising rates gets particular interest.

How long will the BOC pause last?

The BOC is of particular interest, because of the economic similarities between Canada and the US. Since the BOC typically meets before the Fed and operates on the same economic theories, often it will “lead” the Fed in policy decisions. So, an action by the BOC can sometimes get markets to move as they are looking for some clues as to what the Fed will do.

At the moment, though, Canada has a slightly different situation than the US. Inflation has been consistently coming down, both on the headline and core rates. The economy is also seen as a bit less robust than its southern neighbor’s. Canada had a blow-out jobs number in January, just as the US did, it’s broadly understood to be a one-off.

It’s about expectations

Therefore the BOC is expected to keep rates on hold, with the focus on the after-rate press conference. The key after the last meeting was the statement emphasizing that the BOC was pausing rates, and would be paying close attention to the data. That implies that the BOC is ready to hike if the data doesn’t come in line with expectations. A change in the statement that could be interpreted as hawkish is if the language changes to say that further rate increases are likely. A dovish change would be to drop mention of the notion that the BOC was “pausing”.

The BOJ is also expected to hold, but for entirely different reasons and under very different circumstances. Inflation has been rising in Japan, and more than doubles the BOJ’s target. If it were any other central bank, there would be considerable expectation of a rate hike and talk of further tightening.

The changing of the guard at the BOJ

This is the last meeting to be chaired by Hikaru Kuroda, who oversaw nearly a decade of ultra-easing policies. It’s not expected there will be a change in policy in his last meeting (it’s also the last meeting for two of the deputy governors), leaving any change of direction at the BOJ to the new governor.

There has been plenty of speculation that Friday could see the formal appointment of Kazuo Ueda as the new BOJ governor. So far, his comments have been exceedingly cautious about affirming the need to keep with existing policy, but keeping the door open to further changes. Investors will be keen to see if there will be any change in his manner and outlook once he’s confirmed in the job.

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