BoJ maintains ultra-accommodative policy

Chris Scicluna
Emily Nicol

BoJ maintains its ultra-accommodative policy stance as it flags slowing global economy
Contrasting markedly with the policy tightening among other major central banks, but nevertheless consistent with market expectations, the BoJ’s Policy Board today voted unanimously to leave its Yield Curve Control framework unchanged, targeting 10Y JGB yields at around 0% (with an upper limit of 25bps) and leaving the policy rate at -0.1%. With the SNB today having raised rates by 75bps to 0.50% (see more below), the BoJ is now the only central bank with a negative policy rate. So given the diverging monetary policy positions, the yen broke through ¥145/$ for the first time since August 1990, triggering another round of verbal intervention from the MoF’s chief forex official Kanda.

The BoJ still assesses Japan’s recovery to be picking up steam, reflecting not least the waning of supply-side constraints on industrial production and pent-up demand following the relaxation of pandemic-related restrictions. But it also judges the outlook to be extremely uncertain. Among other things, the Policy Board flagged the recent slowdown in other advanced economies. And while it revised up slightly its assessment of public sector investment, albeit merely to be “more or less flat”, it now considered housing investment to be relatively weak. The BoJ also noted ongoing weakness in some firms’ financial positions, justifying the extension of its Special Covid-19 funds-supplying scheme by six months to end-March 2023, and also additional provision of support for SME financing.

Of course, Japanese inflation has risen sharply over recent months, with headline inflation up to 3%Y/Y in August, the BoJ’s forecast measure of core CPI (excluding fresh foods) up to 2.8%Y/Y, and the BoJ’s estimate of trimmed mean CPI up to a new series high of 1.9%Y/Y. And the BoJ expects it to rise further over the remainder of the year, due not least to higher energy, food and durable goods prices, with pressures exacerbated by the weaker exchange rate. So, Kuroda in his post-meeting press conference acknowledged that inflation in the current fiscal year will be higher than the BoJ’s previous forecast in the July Outlook Report. But the Policy Board also continues to expect the contributions of these increases to wane in 2023, with Kuroda expecting core inflation (excluding fresh foods) to be back below 2% during the second half of the fiscal year. As such, the Policy Board continued to state that it would not hesitate to take additional easing measures if required. And Kuroda stated that there will be no need to change materially this current forward guidance for two or three years, although this will of course be out of his control when his tenure ends next April.

As expected, SNB ends negative rate policy, hiking by 75bps and flagging willingness to intervene in FX market
Having surprised the markets back in June with a first hike of 50bps, the Swiss National Bank’s announcements this morning, following its latest policy meeting, were in line with expectations. In particular, the SNB raised its policy rate by 75bps to 0.5%, thus ending the Swiss era of negative rates. Concerned about persistent and increasingly broad-based inflation, for which the headline rate rose to 3.5%Y/Y in August, the SNB stated that “it cannot be ruled out that further increases in the SNB policy rate will be necessary”. However, its updated forecast, based on the assumption of an unchanged policy rate at 0.5% over the horizon, foresees inflation to return to 2% by the end of the horizon. As ever, of course, the SNB will keep an eye on the CHF too, with the statement making it clear that it is “also willing to be active in the foreign exchange market as necessary”.

BoE set to raise Bank Rate by at least 50bps and confirm the start of active Gilt sales
All eyes in the UK today will be on the BoE monetary policy announcement, which is bound to see rates rise again. The magnitude of tightening this month, however, is uncertain, with a good chance of a three-way split. We expect at least one vote for a hike of 75bps, from external member Catherine Mann – who has been concerned about firms’ elevated price expectations and the need to be mindful of additional inflation risks from sterling weakness. Her fellow external member Jonathan Haskel, who has flagged concerns about the risks from labour market tightness, might join her. And the 100bps hike announced on Tuesday by the Swedish Riksbank might also suggest that some of the Bank’s internal members will be inclined to vote for a hike of 75bps this week. However, as she is concerned that the full pass-through from recent rate hikes, e.g. to most borrowers on fixed-rate mortgages, has yet to be felt, dovish external member Sylvana Tenreyro might prefer to raise rates by just 25bps. In addition, the views of new member Swati Dhingra, who recently replaced hawk Michael Saunders, are unclear.

But given the lack of full clarity on the government’s fiscal policy plans, the associated inability to produce detailed updated economic projections, the likelihood of additional economic weakness this month due to the Queen’s death, and recent survey evidence of lower consumer price expectations two and five years ahead, we think the majority on the MPC will vote for a further hike of 50bps – the same as in August – taking Bank Rate to 2.25%. In addition to its decision on interest rates, the MPC will also likely confirm plans to smooth the path of quantitative tightening via a programme of active Gilts sales.

Fed hikes by 75bps as expected, but signals terminal fed funds rate above 4½%
As expected, the Fed hiked by 75bps yesterday taking the target range for the fed funds rate to 3-3¼%. But, consistent with Jay Powell’s recent message that a pivot to easier policy next year should not be the baseline, the Fed’s updated dot-plots suggested a more hawkish rate outlook than the market has recently been pricing. The median dot pointed to a year-end federal funds rate of 4¼-4½%, implying another 75 bps of tightening in November and 50 bps in December. Admittedly, this is a close call, with only one fewer FOMC member pointing to a year-end rate of 4-4¼% than suggesting the median view. But the dots for next year also suggest that all bar one member of the FOMC expects further tightening in 2023, with the median rate for year-end at 4½-4¾%. Rate cuts are, nevertheless, anticipated in 2024, with the median dots suggesting an end-year FFR target range of 3¾-4%. However, market pricing suggests that participants still expect that easing will be required before then, with fed funds futures suggesting a peak between at 4½-4¾% early next year but also cut of 25bps before end-23.

In terms of the Fed’s other economic projections, the median expectation for full-year GDP growth this year was slashed by 1.5ppts from the June forecast to 0.2%. Given the contraction in GDP in the first half of this year, that implies positive growth in H2. And, on average, growth in 2023 is also expected to remain broadly positive, albeit still sub-potential, at 1.2%. That pace is expected by the median FOMC member to push the unemployment rate up from 3.7% now to 4.4% by the end of next year, and keep it at that level into 2025, which would help headline PCE deflator inflation return to 2% by end-2025. But such an outlook might still be wishful thinking – in the past, a rise in the unemployment rate of that magnitude would typically have required non-negligible contraction. And it’s a decent chance that a full-year contraction in GDP next year will indeed be required to engineer the eventual return of inflation to target. In his press conference, Jay Powell acknowledged that “no one knows whether this process will lead to a recession or, if so, how significant that recession would be”. Please read the assessment of our colleagues in Daiwa America here.

ECB’s Schnabel acknowledges likelihood of German recession and sees no signs of wage-price spiral
In an interview with t-online published this morning, one of the ECB’s key hawks, Executive Board member Isabel Schnabel, unsurprisingly reiterated that rates are going to rise again at the Governing Council’s next meeting at end-October. But she gave no clues as to the likely magnitude of that hike. And some of her comments were a little less hawkishly gung-ho than of late. Among other things, while she stated that while, for the euro area as a whole, the ECB was expecting economic stagnation over coming quarters, she noted that a German recession may be unavoidable due to the strong dependency on Russian gas. Of course, she also insisted that what matters for ECB policy is the outlook for inflation not GDP. But in that respect, while she reiterated concerns about possible increases in medium-term inflation expectations, she also admitted that there were no signs “at present” of a wage-price spiral. Indeed, she noted that wage agreements are “nowhere near keeping pace with inflation” and acknowledged that “purchasing power is declining”. The ECB were, however, closely monitoring wage dynamics.

Euro area consumers to remain downbeat; French business sentiment a touch weaker but still above long-run average
The euro area data highlight this afternoon will be the release of the European Commission’s flash September consumer confidence indicator. Given households’ diminishing purchasing power and the prospect of additional substantial interest rate hikes over the near term, expectations are for a drop in headline consumer confidence at the end of Q3, reversing the surprise uptick in August, back close to the series low in July (-27.0). This morning has also seen the release of the INSEE’s French business confidence survey for this month. In line with expectations, the headline indicator fell to a seventeen-month low of 102, albeit remaining just above the long-run average (100) and firmly above the post-pandemic low of 47.4 in April 2020. And the deterioration in the business climate was broad-based at the end of Q3, with the exception of the construction sector which was considered to have remained stable. 

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