Analysts at National Bank Financial note that for now, both the European Central Bank and Bank of Japan are in no rush to tighten policy.
Key Quotes
“The ECB, which left monetary policy unchanged at its July meeting, said it expected interest rates to remain unchanged at least through the summer of 2019. The ECB will continue to purchase assets at a pace of €30 bn/month until end-September after which the pace will drop to €15 bn/month until the end of the year when Quantitative Easing will end.”
“The central bank will then reinvest principal payments from maturing securities “for an extended period of time after the end of the net asset purchases”. The ECB made clear that “significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term”.”
“As such looser monetary policy compared to the U.S. and the UK ─ recall that the Bank of England raised interest rates to 0.75% in August ─ will continue to weigh on the euro over the near term. For now speculators seem to be losing faith in the common currency based on their dwindling long positions. Comes a point, however, when investors will expect and hence price the end of Fed normalization, allowing yield differentials to push up EURUSD.”
“Like the euro, the yen is struggling with unfavourable yields against the U.S. The Bank of Japan, which was expected by markets to move towards normalization instead went for forward guidance, announcing its intention “to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time”.”
“The BoJ will continue with its asset purchase program with the amount outstanding of Japanese government bonds on its balance sheet increasing at an annual pace of ¥80 trillion. While the central bank says the economy is growing above its estimated potential, it bemoaned persistently weak inflation: “due mainly to the experience of prolonged low growth and deflation”¦ firms’ cautious wage- and price-setting stance as well as households’ cautiousness toward price rises have not yet clearly changed”.”
“As such, the BoJ sees risks to prices as skewed to the downside. So, barring a sudden return of risk aversion, the yen is likely to remain under pressure over the forecast horizon.”
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