GBP/JPY rises above 193.00 due to uncertain expectations surrounding BoJ rate hike
- GBP/JPY appreciates due to mixed expectations regarding the BoJ rate hike in December.
- BoJ board member Toyoaki Nakamura emphasized the need for caution in raising rates.
- BoE is widely expected to keep its current interest rates at 4.75% unchanged on December 19.
GBP/JPY extends its gains for the second successive session, trading around 193.10 during the European hours on Tuesday. The recent upward movement in the GBP/JPY cross is likely driven by a weaker Japanese Yen (JPY), stemming from mixed expectations regarding a potential Bank of Japan (BoJ) rate hike in December.
BoJ Governor Kazuo Ueda recently indicated that the timing for the next rate hike is nearing, bolstered by strong underlying inflation data in Japan. This has fueled speculation about a possible rate hike during the BoJ’s December 18–19 policy meeting.
However, conflicting media reports suggest the BoJ might forgo a rate hike this month. Adding to the uncertainty, dovish BoJ board member Toyoaki Nakamura has cautioned against premature rate increases, further weighing on the Japanese Yen.
The Pound Sterling (GBP) gains ground against its major peers as investors become increasingly confident that the Bank of England (BoE) will maintain its current interest rates at 4.75% in the monetary policy meeting on December 19.
Most BoE officials are anticipated to vote for an unchanged interest rate, as UK headline inflation has risen again after briefly falling below the bank's 2% target. The BoE had previously forecasted a rebound in inflation after it temporarily aligned with the desired range.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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