Interest rates: BoJ wears in negative fashion while the Fed pulls the brake

Japan is the country fighting deflation long since. Without success till now. The Bank of Japan decided to cut the interest rates into negative territory. Just like some european central banks did, leaving the Fed always more lonely on the opposite path

There is an odd similarity between the oil price and central bankers. They are all scratching the barrel. The Bank of Japan decided to cut the interest rate into negative at -0,1%, venturing in a new land and paying it with a split amongst its members. A strict majority (5-4) “suggesting unease for such a radical move, though it only apply to new purchases under the ongoing asset purchase program” comments Michael Hewson, chief market analyst at CMC Markets UK.   

Swiss central bank, Bank of Denmark and Riksbank chose the same path before Kuroda while the Ecb has only the deposit rate in negative territory and it is willing to cut it again. The Fed has none. The Fed is going opposite direction and it looks now more lonely than before. Also if the ugly january and “the economic outlook that has become a little bit gloomier since December” made it more cautious. “It shouldn’t really have been a surprise that the Fed left open a decision about what to do in March – explains Hewson -. No central banker is going to pre-commit to that extent, but investors should be able to read between the lines, and the removal of the lines about policymakers being reasonably confident that inflation will rise to 2% in the medium term, as well as a line about economic risks being balanced, is a huge clue that the Fed is a lot more concerned about the economic outlook than it was a month ago”. 

After all it looks not so bad cooling the dollar while waiting to see if the fourth quarter slowdown – data on Gdp are due out today – is only a temporary fact. “With the Q1 data unlikely to be anywhere near complete by the March meeting it would be a huge leap of faith to even contemplate another rate rise under those circumstances, and as such I would suggest a rate move higher in March is highly unlikely. The Fomc will probably prefer to wait to establish whether we see a decent recovery in Q1 data before they make another decision on rates, and given some of the weakness in some of this month’s manufacturing numbers that isn’t a given by any means”.

Source: Michael Hewson, chief market analyst CMC Markets UK