- EUR/JPY depreciates as the latest BoJ Meeting Minutes highlighted the possibility of gradual rate hikes if inflation trends as expected.
- The Euro remains under pressure as ECB plans to continue lowering borrowing costs next year.
- ECB Lagarde highlighted that the central bank could achieve its goal of reducing inflation to the 2% medium-term target.
EUR/JPY retraces its recent gains from the previous session, trading around 163.20 during the European hours on Tuesday. The EUR/JPY cross remains subdued following the release of the Bank of Japan’s (BoJ) Meeting Minutes for October’s monetary policy.
BoJ board members highlighted the possibility of gradual rate hikes if inflation trends align with expectations, potentially reaching 1.0% by late fiscal 2025. The Meeting Minutes also underscored a cautious approach to monetary policy, focusing on wage-driven economic growth while addressing domestic and global uncertainties, along with fiscal measures to counter deflationary pressures.
Japan’s Finance Minister Katsunobu Kato stated on Friday that the government “will take appropriate action against excessive moves” in the foreign exchange market and will continue coordinating with international authorities on forex policies.
Last week, BoJ Governor Kazuo Ueda reiterated that the central bank would wait for further data to assess whether wage growth could maintain its upward momentum next year, aiming for greater clarity on economic trends.
The downside risks for the EUR/JPY cross is strengthened due to the subdued Euro amid rising bets of further rate reduction by the European Central Bank (ECB). Financial Times published an interview of European Central Bank (ECB) President Christine Lagarde on Monday, stating that the central bank is nearing its goal of sustainably bringing inflation down to the medium-term target of 2%. However, Lagarde stressed the importance of continued vigilance, particularly concerning inflation in the services sector.
On Saturday, ECB Governing Council member Boris Vujcic highlighted that the central bank plans to continue lowering borrowing costs in 2025, according to Bloomberg. “The direction is clear—it’s a continuation of the path from 2024, with further reductions in interest rates,” he said.
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.
