EUR/JPY trades flat around 184.00 as investors seek clarity on ECB-BoJ policy outlook
- EUR/JPY flattens around 184.00 while investors await fresh cues on ECB-BoJ policy outlook.
- ECB’s Nagel stated last week that an interest rate hike in April is certainly an option.
- The BoJ keeps the door open for tightening monetary conditions further in the March policy meeting.
The EUR/JPY pair trades in a tight range around 184.00 during the European trading session on Thursday. The pair consolidates as investors seek fresh cues regarding how monetary policies by the European Central Bank (ECB) and the Bank of Japan (BoJ) will flare going ahead.
Recent commentaries from a majority of ECB officials have signaled that the April policy meeting is wide open, citing that risks to inflation have shifted to the upside amid higher oil prices in the wake of the Middle East war.
Last week, ECB policymaker and Bundesbank chief Joachim Nagel said that an interest rate hike in the April policy meeting is certainly an option, as “every passing day contributes to an increase in inflationary risks”.
During the day, ECB Governing Council (GC) member and Governor of the Lithuanian central bank, Gediminas Simkus, said that the central bank needs to exercise caution on interest rates as the situation is changing. However, he stated that it is too early to predict the central bank’s policy action in the April meeting.
Meanwhile, the BoJ continues to keep the door open for further monetary policy tightening if the Japanese economy operates in line with expectations, as stated by the central bank in the monetary policy statement last month.
On Wednesday, BoJ’s newly appointed member Toichiro Asada said that higher oil prices have prompted upside inflation risks.
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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