This week will see the continuation of central bank meetings, with the Bank of Japan and the Bank of England meetings on the docket.
The meetings come at a time when some of the global risks are starting to show signs of progress.
The trade deal and the UK Brexit issues were the two biggest concerns. However, with reports suggesting that a deal has been made, investors and economists are likely to be a bit more relaxed.
Elsewhere, the conclusion of the UK general elections has given the Conservative party a majority. This translates to the UK government likely to proceed with its original Brexit plan. The main litmus test comes when the bill is due to be tabled in the UK parliament on the 20th of December.
Both central banks will most likely refrain from making any changes to the respective interest rates. This would keep these meetings consistent with other central bank meetings in the past week.
The Federal Reserve and the ECB both maintained their respective policies unchanged. There was also not much of a deviation from the forward statements either. Thus, it wouldn’t be surprising to see any changes from the BoJ or the BoE this week.
Here’s a quick preview of what to expect from the respective central bank meetings.
Bank of Japan to Hold the Ship Steady
At the outset, the Bank of Japan is not expected to make any changes. However, given the central bank’s propensity to spring a surprise, there is a probability.
For the moment, central bank officials will likely give some time for the fiscal spending to impact the economy. Expectations show that policymakers will stay on the sidelines ahead of the spending plans due to roll out next year.
Global risks are showing positive signs. The concerns of trade wars will likely fall. But questions remain on whether this will really have much of an impact on the domestic economy in Japan.
Recent data indicates that domestic growth is sluggish. The latest Tankan Survey was disappointing. Following the global financial crisis, the Tankan Surveys have been some of the worst-performing. This suggests that business sentiment remains weak in Japan.
But the October BoJ report expects that demand will rise over the coming months.
Overall, the BoJ meeting will not be a major market-moving event.
Bank of England Could Turn Dovish
Although the Bank of England will also stay on the sidelines, the odds of a dovish outlook now rises.
This comes with at least part of the Brexit uncertainty receding. Investors are assigning a 50% probability for a rate cut in March 2020.
If Boris Johnson’s plans of leaving the EU, end of January remains on track, then we anticipate that focus will shift to the economic data.
There is already evidence from the United Kingdom that the economy is still not out of the woods. Growth has been hit largely due to the Brexit uncertainty. Therefore, a premature move (hawkish) from the BoE could be the straw that breaks the camel’s back.
It will be interesting to see if there will be a shift in the BoE’s language. Another factor to watch out for is the number of dissenting voters.
The December BoE meeting will also be the penultimate meeting chaired by Mark Carney. Carney is set to leave the Bank of England end of January next year.