Euro flattens against Japanese Yen, ECB-BoJ to raise rates in September
- EUR/JPY consolidates at around 183.85 as investors seek fresh remarks on US-Japan joint intervention.
- Both the ECB and the BoJ are expected to raise policy rates in September.
- Risks to Eurozone inflation remain tilted to the upside.
The Euro (EUR) trades flat at around 183.85 against the Japanese Yen (JPY) during the European trading session on Friday. The cross consolidates while investors seek fresh cues regarding whether there will be more United States (US)-Japan joint intervention to prop up the Japanese currency.
On the last day of July, the US and Japan jointly intervened to counter “excessive volatility and disorderly movements in the Japanese yen in recent months", Japan Ministry of Finance (MoF) reported.
On the monetary policy front, both the Bank of Japan (BoJ) and the European Central Bank (ECB) are expected to raise interest rates in the September policy meeting.
Yen rate expectations rise
Analysts at ING highlight that markets are increasingly positioning for tighter policy from the BoJ, with investors now “price close to a 75% chance that the BoJ hikes 25bp in September.”
According to a report from Reuters, three sources familiar with the matter said that the BoJ IS set to raise interest rates as soon as September and is likely to hike more aggressively thereafter from the current pace of roughly twice a year.
The ECB is also expected to raise interest rates in the September policy meeting as risks to Eurozone inflation remains titled to the upside.
Analysts at HSBC stress that the policy outlook is being shaped by conflicting forces, noting that “how these inflation and growth cross-currents interact is crucial for policymakers.” Against this backdrop, HSBC says that “we expect the European Central Bank (ECB) to now deliver another rate rise in September".
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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