BOJ: To Hike or to Hold?

Central Bank Speak

February 20th 2007
Yield Spread Analysis 02/13 – 02/20

Over the past few weeks, yield curves around the world have moved in tandem as the concerns of bond traders have been pertinent to all markets. Last week’s news: diminishing rate hike prospects and flight to safety. In theUS, Fed Governor Bernanke’s comments on the economy were more dovish than traders had anticipated, while disappointing TICS, retail sales, and housing data only reiterated the sentiment, subsequently sending the long end of the US yield curve plummeting. Canadian yields followed those of the US in sympathy, as the export-dependent nation requires the demand of their southern neighbor for many of their product shipments. Meanwhile, the scenario for the JGB yield curve was slightly different. Significantly stronger-than-expected Q4 GDP for Japan sent the short-end of the curve higher, while jawboning by fiscal officials who talked down speculation of a monetary policy tightening this week sent the long-end down 2bps.

Looking forward, Japanese rates could be sent reeling on the Bank of Japan’s interest rate decision this week. With JGB yields easing and the Japanese Yen weakening once again, traders are clearly pricing in another month of steady policy. Thus, any sort of adjustment will send traders scrambling to price in the change.

BOJ: To Hike or to Hold?[B]

[/B]After the surge in Q4 GDP, analysts have been split on the probabilities of a rate hike by the Bank of Japan this week. However, it seems that fiscal officials have tamed the typically hawkish BoJ Governor Fukui, as his commentary has been unusually dovish:

[U]Toshihiko Fukui, Bank of Japan Governor

[/U]“I’m not too optimistic about risk factors to say they are fading away? In order to guide the economy onto a sustained growth path under price stability, supported by balanced domestic and overseas demand, we must conduct monetary policy by closely monitoring the situation” – February 14, 2007

[U]Koji Omi, Japanese Finance Minister

[/U]“The economy continues to show sustainable recovery but we would like the BOJ to support it on the monetary policy front. But as I have been saying, I would like to refrain from commenting specifically on monetary policy and interest rate levels.” – February 20, 2007

Hiroko Ota, Japanese Economics Minister

“We have the (GDP) data, and it’s up to the BOJ how it views the data. As monetary policy is based on a forward-looking stance, I expect the BOJ to decide on policy with careful consideration of economic and price developments.” – February 20, 2007

Yasuhisa Shiozaki, Chief Cabinet Secretary

“Monetary policy is up to the BOJ. We expect the BOJ to make an appropriate decision while paying attention to the government’s broad economic policy.” – February 15, 2007

Former BOJ Deputy Governor Fujiwara thinks normalization should be done sooner rather than later: [U]


Sakuya Fujiwara, Former BOJ Deputy Governor

“If (interest rates) are left as they stand now, as Japan 's financial markets are in the process of normalization, we can imagine that something bubbly could happen before it returns to normal. A rate hike would be hard for some companies to bear, but the main job of a central bank, which is in a position to conduct across-the-board monetary policy, is to carry out interest rate policy in line with overall macroeconomic trends.” – February 19, 2007

US Fed – FOMC vs. the Markets

Commentary from FOMC voters continues to signal optimistic growth prospects for the US. However, soft economic data has led Fed funds futures pricing in a 36% chance of a September rate cut:

[U]Ben Bernanke, Federal Reserve Chairman (Voter)

[/U]“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes.” – February 14, 2007

“Inflation pressures appear to have abated somewhat…in large part as a result of declines in the price of crude oil. Readings on core inflation have improved modestly…Nevertheless, the core inflation rate remains somewhat elevated.” – February 14, 2007

Michael Moskow, Chicago Federal Reserve Bank President (Voter)

“I see the economy with some solid underlying momentum behind it and inflation running too high?We should see continued progress on inflation going forward. If we don’t see progress, the FOMC will respond.” – February 19, 2007

“It is much too early to say that inflation is no longer a concern.” – February 19, 2007

[U]William Poole, St. Louis Federal Reserve Bank President (Voter)

[/U]“Where we stand right now (on monetary policy) is a pretty good place. There is no compelling information presently available that suggests the need to reposition the rate. But it may come. The fed funds rate is not going to be 5.25% forever.” – February 16, 2007

ECB – Preparing the Markets for 3.75%

Central bank and fiscal officials from throughout Europe have been the biggest cheerleaders of Euro-zone growth, and last week was no different:

Jean-Claude Trichet, European Central Bank President

“Creating price stability supports growth and job creation…by maintaining price stability the European Central Bank is creating an environment that is conducive to sustainable economic growth and job creation.” – February 19, 2007

Lorenzo Bini Smaghi, European Central Bank Executive Board Member

“Economic expansion is becoming increasingly self-sustaining. Confidence remains high (and) economic activity continues to expand robustly?Later in 2007 inflation rates are expected to rise again as a result of unfavorable base effects.” – February 16, 2007

José Manuel González Páramo, European Central Bank Governing Council Member

“Strong monetary and economic growth in the Euro-zone point to risks to price stability. The signs we are getting from strong monetary growth are not reassuring.” – February 16, 2007

Joaquin Almunia, EU Economic and Monetary Affairs Commissioner

“The European economy has done remarkably well in 2006 and is set to continue to grow briskly in 2007. This is not only due to the favorable cyclical conditions. It also reflects an increased resilience of the European economy and shows that the economic reforms already carried out were worth the effort.” – February 16, 2007

Michael Glos, German Economic Minister

“ Germany as a business location is excellently positioned. The direction of the economic policy is the right one.” – February 13, 2007