BoJ Slashes Rates

Daily Analysis - 29/01/2016

Japanese Rates Move into Negative Territory

In a stunning turn of events, the Bank of Japan opted to cut the benchmark interest rate from 0.10%, slashing 20 basis points to -0.10% with the Yen weakening broadly against a basket of currencies in response. Negative interest rates were implemented to spur inflation amid growing concerns of a prolonged global downturn.

UK GDP Matches Expectations

The United Kingdom’s preliminary reading of fourth quarter gross domestic product showed expansion of 0.50%, meeting consensus estimates and rising slightly above the final 0.40% expansion reported in the third quarter. The figure from the Office of National Statistics recorded growth in services and agriculture, climbing to 0.70% and 0.60% respectively while construction and industrial production fell by -0.10% and -0.20% during the same period. On an annualized basis, growth moderated to 1.90% from 2.10% while total GDP for 2015 printed at 2.20%, lower than last year’s more moderate growth of 2.90%. The Bank of England is preparing to its own meeting of the Monetary Policy Committee on February 4^th, with renewed expectations that policymakers will opt to adjust forecasts on growth and inflation for the coming years. Upon the release of the GDP figure, the Pound Sterling gained ground over the US dollar, reaching 1.4324.

Japan Eases Policy Further

Bank of Japan Governor Haruhiko Kuroda has chosen to surprise markets once again after introducing, for the first time, negative interest rates to Japan. Banks will now be required to pay interest on excess reserves sitting on deposit with the Central Bank. Rates have been cut to -0.10% after sitting near the zero threshold of 0.10% for more than 5 years. The report stated that the country must make greater progress on the fight to restore inflation which has been increasingly difficult amid subdued wage growth, persistent deflationary forces from weak energy prices, and recent Chinese financial market turmoil. The Central Bank’s Government bond purchases, exchange trade funds and estate investment trusts will be left unchanged for the time being. Kuroda also reiterated that further interest rate cuts may be implemented if deemed necessary. The statement led most analysts to expect additional surprises from the Central Bank down the road.

Oil Prices Surge Higher on Rumors

Oil jumped to prices of over $34.00 a barrel on Thursday, after the Russian Energy Minister Alexander Novak commented that the Saudi’s were willing to discuss the possibility of production cuts in an effort to shore up falling crude oil prices, rumors that were later dismissed by OPEC. Crude oil for March settlement soared on the comments, with West Texas Intermediate jumping to $34.81 while Brent climbed as high as $35.58. However, both Saudi Arabia and OPEC later remarked that these comments on cutting output by 5.00% were unsubstantiated and there was no plans to hold an emergency meeting of OPEC members in February. With oil production feared to rise further with growing Iranian exports and Saudi Arabia not backing down amid softer demand from one of the biggest energy consumers, China, has cast a shadow in many emerging market economies that are oil price dependent.

South Africa Hikes Rates

The South African Reserve Bank opted to raise interest rates by 50 basis points, move the benchmark to 6.75% in its latest decision. The move was widely anticipated by analysts and economists considering the high inflation rates the country is dealing with considering the devaluation of the South African Rand that has put substantial pressure on prices, especially of imported goods. This shift in inflation comes while the country is undergoing a severe drought, boosting food prices even further. Two of the policy member’s insisted on a 25 basis point increase, whereas the other three voted for a 50 basis point hike. Since touching a record low 5.00%, The South African Reserve Bank has pushed rates up 5 times with 3 of the adjustments occurring in less than a year. The country’s currency has been in persistent turmoil after the South African President selected to fire his prominent Finance Minister.