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Attention shifts to July after central bank inaction

Attention shifts to July after central bank inaction

July will be a key month for monetary policy shifts after three of the world’s largest central banks formed consensus last week.

The Bank of England (BoE), US Federal Reserve (Fed) and Bank of Japan (BoJ) all met expectations of inaction, with May’s non-farm payroll data shock affecting the Fed and this week’s EU referendum vote playing on the BoE’s mind.

The BoJ’s decision to leave its rates at -0.1 per cent and quantitative easing (QE) at ¥80trn (£538bn) per year was also not a surprise, but analysts now expect a hike in QE next month after slowing inflation.

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The country’s government recently delayed a hike in sales tax to October 2019 in a bid to boost consumer sentiment. This had brightened the outlook for short-term domestic demand according to Marcel Thieliant, senior Japan economist at Capital Economics.

But the firm also believed July would see a significant altering of policy.

“The upcoming meeting in July coincides with the release of the ‘Outlook for Economic Activity and Prices’, which allows for a thorough assessment of the situation. Our forecast is that the Bank will then step up the annual pace of expansion of the monetary base from the current ¥80trn to ¥90trn, and cut the policy rate from -0.1% to -0.3%.”

In the US, the Fed did not enact its first rate rise since December, leaving it between 0.25 and 0.5 per cent.

The Federal Open Market Committee (FOMC) said it was concerned by May’s disappointing 38,000 non-farm payroll figure but noted economic growth was continuing.

Chairwoman Janet Yellen said action in July was “not impossible” but expectations are it would require a payroll turnaround and a vote for the UK to remain in the EU.

The Fed did cut its future interest rate expectations, however. It said the median rate by the end of 2017 will now be 1.6 per cent, a drop of 30 basis points, and the end of 2018 will see the rate reach 2.4 per cent, a drop of 60 basis points.

JPMorgan Asset Management Global Macro Opportunities manager Talib Sheikh said: “The [Fed] continued to downgrade its assessment of the pace of rate hikes. Additional clarity on the outlook and global risks should be supportive of a hike in July or September and another at the end of the year,” he said.

Ian Kernohan, economist at Royal London Asset Management, said Ms Yellen’s statement about disappointing payroll figures despite economic growth may not give the green light for a July rise.

However, he added: “It does keep the option open should the labour market data improve. Any adjustment in the stance of monetary policy is still expected to be gradual.”

The BoE kept interest rates and quantitative easing unchanged. Market expectations for central-bank action gave a probability around zero given this week’s referendum.