Australian Dollar flattens against Japanese Yen after Tokyo CPI data
- AUD/JPY flattens near 109.50 as the Japanese Yen struggles to hold early gains.
- Japan’s Cabinet Office said that the BoJ should carefully assess cumulative impact of previous rate increases.
- Investors seek fresh cues regarding the RBA’s monetary policy outlook.
The Australian Dollar (AUD) turns flat at around 109.50 against the Japanese Yen (JPY) during the European trading session on Friday after recovering early losses. The cross rebounds as the Japanese Yen struggles to hold early gains despite the release of the hot Tokyo Consumer Price Index (CPI) data for September.
Earlier in the day, Statistics Bureau of Japan reported that Tokyo CPI ex. Fresh Food jumps to 2.7% Year-on-Year (YoY) from 1.8% in August. The inflation data was seen at 2.4%. Tokyo CPI ex. Food, Energy accelerates at a significant pace to 3% YoY from the previous reading of 2%.
Hotter-than-projected Tokyo inflation data will likely boost hawkish Bank of Japan (BoJ) interest rate expectations.
BoJ Summary of Opinions (SoP) of the September meeting released on Thursday also showed that several policymakers support more interest rate hikes. “One member said appropriate to keep raising rates in line with economy, price, financial developments,” BoJ SoP showed.
The SoP report also showed that a few officials argued in favor of accelerating the monetary-tightening cycle to contain inflationary pressures and show BoJ’s commitment to achieve price stability. “BoJ must act nimbly, show market determination to prevent inflation overshoot and consider impact on FX market,” another member said.
However, the comments from representatives of the Cabinet Office at the BoJ board appeared that they urged central bank to reassess their monetary policy targets. “Cabinet office rep says government expects central bank to uphold accountability, carefully assess cumulative impact of previous rate increases,” the report showed.
On the Australian Dollar front, investors seek fresh cues regarding whether the Reserve Bank of Australia (RBA) will interest rates further this year after delivering four hikes of 25 basis points (bps), pushing the Official Cash Rate (OCR) to 4.6%.
RBA Governor Michele Bullock said at the monetary policy press conference on Tuesday that the central bank won’t hesitate to raise rate further, if needed to bring inflation down.
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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