Stockholm (Ekonamik) – Asides from Brazil and the USA, the UK and Japan also held their monetary policy meetings this week. While no action was taken by either bank with regards to their monetary policy, the similarities end there. While the BoJ signalled a willingness to join the tide of monetary easing just started by the Fed, the BoE remains paralysed by Brexit.
Much was made of an aggressive line from the Monetary Policy statement of the BoJ, which had echoes of Draghi’s 2012 “whatever it takes” comment that saved the Euro. “In particular, in a situation where downside risks to economic activity and prices, mainly regarding developments in overseas economies, are significant, the Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost.” (Emphasis added)
“Its ‘ready to act’ stance is aimed at stopping the Japanese yen from appreciating against a backdrop of heighted expectations for easing from both the Fed and the ECB. In other words, the BoJ has officially entered the currency wars,” commented Piya Sachdeva, Economist at Schroders. “It is well known to investors that the BoJ has little ammunition to ease further, given that interest rates are already negative and a full blown asset purchase programme. We believe that the BoJ will be reluctant to ease further, but so far will be quite happy about its ability to keep the yen fairly stable.
In the UK, the perception was not the same following the election of Eurosceptic Boris Johnson as leader of the conservative party and his appointment as Prime Minister. According to the monetary policy statement, “the MPC voted unanimously to maintain Bank Rate at 0.75%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.” The Bank continued to express concerns about the effects of Brexit. “Brexit-related developments, such as stockbuilding ahead of previous deadlines, are making UK data volatile,” noted the statement. “Looking through recent volatility, underlying growth appears to have slowed since 2018 to a rate below potential, reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade.”
“The BoE’s latest Quarterly Inflation Report suggests that growth will slow in 2019, and not recover until 2021 assuming a smooth Brexit,” commented Azad Zangana, Senior European Economist and Strategist at Schroders. “The UK economy is struggling to stay above water. Brexit uncertainty has hit confidence, causing many companies to postpone or cancel investment projects. Even households are now cutting back,” the same economist noted at the start of July. “According to the latest survey from the British Retail Consortium, average sales growth weakened to just 0.6% in the 12 months to June, which is the smallest rise since records began in 1995.” If the economy continues to suffer the effects of Brexit, the BoE will eventually have to intervene, Zangana notes. ” The next prime minister is almost certain to loosen fiscal policy after years of austerity. (…) Monetary policy would be more effective, but the Bank of England (BoE) seems reluctant so far to change course. The messaging from the BoE is that it is keen to raise interest rates to more normal levels, but is being held back by the high degree of uncertainty and risk that Brexit presents. Our forecast has the BoE on hold this year, and one hike next year assuming an orderly Brexit.” (emphasis added)
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