The Bank of Japan and US Federal Reserve maintained status quo and kept key rates unchanged in view of sluggish global growth.
While the BoJ maintained its optimistic view of the economy, it cut its view on consumer inflation to say prices were likely to fall slightly year-on-year or hover around flat for the time being.
This is not the first time global concerns have played into Fed decisions on domestic monetary policy. Last fall the US central bank deferred an expected rate rise after global markets swooned in response to an unanticipated slowdown in China’s economy.
Reacting to the decision, the Japanese yen rose more than 1 per cent against the dollar to a 20-month high while the Nikkei stock average futures fell more than two per cent. The US also stock market fell for a fifth straight day on Wednesday as investors set aside the Federal Reserve’s interest rate decision and remained focused on next week’s vote on whether Britain will remain in the European Union or opt for a “Brexit” from the EU. The Dow Jones industrial average fell 34.65 points, or 0.2 percent, to 17,640.17. The Standard & Poor’s 500 index fell 3.82 points, or 0.2 percent, to 2,071.50 and the Nasdaq composite fell 8.62 points, or 0.2 percent, to 4,834.93.
We take a look at reasons why Japan and US central banks didn’t go for a rate cut
Bank of Japan
– The Bank of Japan kept monetary policy steady even as sluggish global growth and anaemic inflation put policymakers under pressure to do more to reflate the economy out of stagnation
Despite nearly three years of aggressive money printing, inflation has ground to a halt on weak consumption and exports.
– “There is nothing in recent economic indicators that would lead the BOJ to change its economic outlook now,” said Norio Miyagawa, senior economist at Mizuho Securities. “However, the rising yen will place more downward pressure on consumer prices, so I expect the BOJ to ease in July, using all three dimensions of its current policy framework.”
-A possible vote by Britain to leave the European Union was the biggest near-term concern for BOJ officials as well, and all the more reason to hold the rate cut like its US counterpart until after the June 23 referendum. A Reuters poll showed economists have seen a much higher chance of the BOJ easing at its meeting on July 28-29, when it issues fresh quarterly growth and inflation forecasts, assuming that global markets remain stable.
In addition, receding expectations of a near-term US rate hike have dashed the BOJ’s hopes of getting help from Fed policy to keep sharp yen rises at bay.
US Federal Reserve
-The pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened.
-Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Federal Open Market Committee’s 2 per cent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
-Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.
-Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
-Among other reasons, Federal Reserve Chair Janet Yellen left interest rates unchanged following impending vote in Britain on whether to quit the European Union. “I think it’s fair to say that it was one of the factors that factored into today’s decisions,” Yellen said of the “Brexit” vote next week. “Obviously how that turns out is something that will factor into future decisions.”
With agency inputs