BOE,BOJ,OMOandsearchforinflation

After the FOMC meeting on Wednesday, yesterday we had some more central banks announcing their monetary policy like Bank of Japan , Bank of England and South Africa Central Bank (SARB). The constant thread which ran across all announcements was the hold on the rates, optimism on the current state of the economy but with a nod to COVID danger and the need to get inflation back up to the target levels.

Starting with BOJ, as expected it maintained its -0.1% short term interest rate target and a pledge to keep the 10 year Government bond yield around zero. The inflation in Japan, which is close to zero currently, is expected to remain well below the target rate of 2% for years to come. There was also no tweak to the asset purchase program. BOJ assessment of the current economic conditions was better than the previous meeting where they termed it as “extremely serious”.

Japan is also currently undergoing a regime change after PM Abe passed the baton to his cabinet colleague Suga Yoshihide after he stepped down because of illness-related complications. BOJ Governor Kuroda maintained that they intend to work closely with the new regime. Readers would remember that both Abe and Kuroda together are considered the architects of the Abenomics policy regime which was formulated to pull the Japanese economy out of the slump in which it has been since the early 90s. The three tenets of Abenomics refer to monetary easing by the CB, fiscal stimulus by government spending and structural reforms.

We had put up a query yesterday on how inflation can be stoked up in case the central bank has reached the lower limit of monetary policy easing. Abenomics is, in a way, a solution to that.

In the BOE meeting it was also decided unanimously to maintain the bank rate at 0.1% and continue with existing bond purchase programmes of both the UK government and investment grade corporates. The total stock of such purchases will be capped at GBP 745 bn. The CPI inflation for August is at 0.1% and is expected to return to its target level of 2% in 2 years time. The economic projections though remain predicated on virus improvement and an orderly departure from the EU system (Brexit).

The BOE meeting minutes indicated that central bank plans to explore how a negative bank rate can be implemented if the need arises. Pound sterling reacted to that statement. We have seen previously that negative rates in any economy can set up that country’s currency for a carry trade play. For years the Japanese Yen was the favourite for such play where investors would borrow in Yen and then invest in higher yielding assets.

The South African Reserve Bank also came up with the rate decision where they kept the repo rate unchanged at 3.5%. Rand strengthened post the policy announcement. On the data side, the initial jobless claims in the US came in at 860,000 for the last week. The number has now stabilised around the 850,000 mark for the last three readings indicating that any progress from here on will be gradual and painful.

As of the market wrap, the is DXY down at 92.90, US 10 year @ 0.68, EUR @ 1.1850, GBP @ 1.2950, Gold @ 1951$/oz , Brent crude @ 43.50 $/bbl.

Domestically, the RBI announced OMO for 10k Cr INR due on Sep 24 (no OT this time). The auction cut offs for OT yesterday saw government purchasing old 10 year benchmark at yields 5 bps better than the prevalent markets. We will have the weekly 30k Cr INR auction today.