Investors Await Fed, ECB and BoJ Interest Rate Decisions
Three of the world’s top central banks, the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ) will announce their interest rate decisions this week.
The tip-off belongs to the Fed’s governing board which will convene later in the evening to discuss borrowing costs based on the latest financial data reports. The Fed will pass the ball to the ECB with global markets expecting to see how the eurozone’s central bank aims to tame inflation. Last but not least the BoJ is expected to reveal its interest rate decision on Friday.
Fed Interest Rate Decision
On Wednesday, market analysts and financial news reporters will eagerly wait to see how the Fed’s board will react to the latest data releases regarding the state of the US economy. The CME FedWatch Tool gives an 89.6% chance for the Fed’s policymakers to keep rates unchanged. It should be noted that just a week ago (07.06), the CME’s FedWatch Tool indicated a 72.5% chance.
The US CPI inflation report for May showed that consumer prices rose by 4% on an annualised basis in May, surpassing economists’ expectations that had expected a 4.1% reading. May’s headline inflation figure was the lowest recorded since April 2021. Economists speaking to CNBC on June 13th suggested that “the encouraging trend in consumer prices will provide the Fed some leeway to keep rates unchanged this month and if the trend continues, the Fed will not likely hike for the rest of the year.”
Economists at ING mention in a report that was published on June 12th: “In March, they (Fed) signalled rates would be left in a 5-5.25% range through to year-end with rate cuts in 2024. We suspect there will be only minor tweaks in their forecasts. Nonetheless, the big risk is that even if they do hold rates steady this week they insert a further hike into their central forecast, which will see markets firmly swing in favour of a 25bp move in July.”
ECB To Decide On Rates
On Thursday it will be the ECB’s turn to decide on interest rates. Contrary to the Fed, the ECB’s policymakers are likely to proceed with a 25 basis points rate hike as a Reuters poll among economists has suggested. Flash estimates showed headline inflation in the eurozone dropped to 6.1% in May, significantly lower than April’s 7% figure.
European Central Bank (ECB) governing council member Gabriel Makhlouf said that explained that it would be a "question of judgement" whether they will need to continue with rate hikes after summer. The ECB’s policymaker also noted that key rates are likely to stay there once they reach the "top of the ladder of increasing interest rates.”
Economists at Crédit Agricole also forecast a rate hike by the ECB, adding that raising borrowing costs could support the single currency. “We expect a 25 bps rate hike along with indications from the ECB that it expects persisting inflation in the Eurozone and does not believe financial conditions have tightened enough to threaten growth, could spur further front-loading of rate hikes and support the Euro. However, we expect the Euro to consolidate mainly against currencies with dovish central banks or banks that have signaled the peak of their tightening cycle, such as the Japanese Yen and the New Zealand Dollar,” they note in their report.
Bank of Japan Rate Decision
The BoJ is going to be the third major central bank to announce its decision on interest rates on Friday. Although core CPI inflation has risen to 4.1%, the highest level recorded in the last four decades, the BoJ does not seem willing to follow the pattern of other central banks. The BoJ’s forecast continues to predict that core inflation will fall below its 2% target by the end of this year.
Reuters sources suggested that Japan’s central bank is likely to maintain its -0.1% short-term interest rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy. Speaking to Bloomberg reporters, ex-deputy governor Masazumi Wakatabe said that he forecasts no change in monetary policy this month and added that “it’s still too early to call that this inflation has been sustainable and stable.”
New Zealand GDP Q1 2023 Report
Later today, Statistics New Zealand will release data regarding the country’s GDP growth in the first quarter of 2023. Economists forecast that the economy expanded by 2.6% on a year-to-year basis but shrank by 0.1% on a quarterly basis.
A survey by the International Monetary Fund (IMF) published on June 13th noted that “New Zealand is likely to continue slowing in the near term as monetary tightening takes hold. Inflation is declining but will remain high for a while. The current account balance has deteriorated significantly, reflecting excess demand and one-off factors.” IMF’s analysts also mentioned that “the monetary policy stance is appropriate and should aim to bring inflation to target. The RBNZ should continue to monitor financial conditions and calibrate macroprudential settings as required to maintain financial stability.”
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