Daily Commentary BY THE CURVE TEAM –

Central Bank Conundrum

24th of January, 2018

The Bank of Japan was the first of two major central banks to navigate a tricky monetary policy meeting this week which could give us some clue to next major meeting tomorrow. While NAFTA negotiations continue, Trump’s trade war got underway and the countries involved aren’t happy about it.

Yesterday the Bank of Japan successfully negotiated their monetary policy meeting without upsetting the apple cart. With the improving outlook for global growth and current synchronised upswing in activity, there is growing pressure for a number of central banks to follow in the Fed’s footsteps.

The problem for the likes of the Bank of Japan and the ECB however, is that their currencies are already appreciating on expectations of a change in monetary policy settings. This in effect is tightening overall monetary policy conditions and delaying the need to adjust policy as soon.

The other risk that they face, is if they do signal that a change in policy is on the horizon, it is likely to fuel a further appreciation in their currencies, making it harder to remove the emergency settings.

With that context, we saw the Bank of Japan make no change to its current setting of the overnight cash rate and 10 year bond rate target. There was even one dissenter on the Board who argued that the bank should state that it will “take additional easing measures” if the current expectations for higher inflation fails to materialise.

The ECB who is also scheduled to meet this week faces a similar dilemma, which will make their post meeting announcement incredibly important.

They other major news overnight was the introduction of new tariffs by the Trump administration on washing machines and solar panels. The announcement has already drawn a reaction from South Korea who is looking to reimpose tariffs of its own on US goods while China is also protesting.

With Mexico and Canada already on edge over the Nafta negotiations, this theme is something worth keeping an eye on over the year ahead.

The focus the next 24 hours will be on PMI’s from around the globe ahead of the ECB’s announcement tomorrow evening local time.

David Flanagan

Director - Interest Rate Markets