Bank of Japan ends negative interest rates
The Bank of Japan has announced the termination of its policy of negative interest rates and yield curve control following its latest meeting, saying its 2% inflation target would be achieved in a “sustainable and stable manner”, but anticipates that accommodative financial conditions will be maintained for the time being. The yen has lost ground to the dollar post the announcement though, falling to over Y150. The US currency is also firmer against the euro ($1.0850) and sterling ($1.2690) this morning, extending last week’s gains, while the euro-sterling cross is largely unchanged (85.5p).
Japanese bond yields have fallen back a touch following the central bank’s policy announcement. Yields elsewhere are little changed this morning having nudged higher yesterday, which in turn followed a sizeable increase in yields last week (with US and German 10-year yields rising by 20-25bps and equivalent UK yields up around 10bps).
The Bank of Japan is increasing its short-term policy interest rate from-0.1% to a range of 0% to 0.1%, and while it is terminating its policy of capping bond yields, it will continue its purchase of government bonds, saying it will increase the pace of purchases “in the case of a rapid increase in long-term interest rates”. In terms of the outlook for inflation, it says a virtuous cycle between wages and prices is helping inflation return to its 2% target on a sustainable basis.
The Governor of the Central Bank of Ireland says his “current view is that the (inflation) picture should be sufficiently clearer when the ECB Governing Council meets in June to give us sufficient confidence to make monetary policy less restrictive”, noting that “waiting for clear and unambiguous evidence is also not realistic and we have to manage the uncertainty and make decisions on the evidence in front of us”.
The focus this week is on the Fed, which begins its two-day monetary policy meeting later today. It is certain to keep interest rates unchanged, but with inflation proving sticky recently, it may again say that it “does not expect it will be appropriate to reduce (rates) until it has gained greater confidence that inflation is moving sustainably toward 2%”.
The Bank of England MPC also announces its latest interest rate decision this week (Thursday). It is expected to keep policy on hold, but it will be interesting to see if there are any dissents this time around (two of the nine MPC members voted for a 25bps hike at the February meeting, while one voted for a 25bps cut).
Economic data due today include Euro area labour costs for the final quarter of last year, while over the rest of the week, we get UK CPI inflation and retail sales tomorrow and Friday respectively with flash PMIs for the main economies on Thursday.