BoJ & BoE to keep policy unchanged as the Fed cuts

16 December 2024

Chris Scicluna; Emily Nicol

Monetary policy meetings

Fed set to cut rates by 25bps, but focus on FOMC’s updated dot plots
A busy week for monetary policy announcements kicks off with the FOMC announcement on Wednesday, which will be accompanied by updated macroeconomic projections including the dot-plot of members’ rate forecasts for coming years. While the Fed’s year-end projection of its preferred inflation measure – the core PCE deflator – is likely to be revised higher and the unemployment rate revised lower from September, the Fed is widely expected to cut the target range by 25bps to 4.25-4.50%, representing a third successive cut to take the cumulative easing so far this cycle to 100bps. But while the Committee is likely to reiterate that risks to achieving its employment and inflation goals remain roughly in balance, uncertainty about the fiscal policies of the incoming administration, including with respect to tariffs, will mean that Chair Powell will likely signal a readiness to be cautious in easing policy in 2025 and beyond. Daiwa America’s Lawrence Werther expects the FOMC’s median dot for end-2025 to be little changed from the September projection of 3.25-3.50%. But he also expects a more cautious outlook for 2026, 2027 and the longer run, with an implied steady-state FOMC target range of 3.00-3.25%, up from 2.75-3.00% in September.

BoJ expected to leave rates on hold, but Ueda likely to leave door open for hike in the New Year
Despite an encouraging Tankan survey and above-target inflation readings, recent media reports suggest that BoJ officials are in no hurry to raise rates again. As such, Daiwa Securities’ BoJ watcher Mari Iwashita expects no change to the BoJ’s policy rate (0.25%) when the latest meeting concludes on Thursday. Certainly, after the ruling coalition lost its majority in October’s Lower House election to increase uncertainty about the direction of fiscal policy, BoJ policymakers might well prefer to await the FY25 budget announcements over the Christmas period, as well as further signals about the coming year’s Shunto wage negotiations, before shifting policy again. They might also be sensitive to uncertainty about the global political, economic and market environment. But Governor Ueda will likely continue to leave the door open to further hikes in the coming year, perhaps with a move to coincide with the publication of updated macroeconomic projections in January.

BoE likely to keep Bank Rate unchanged in absence of further downside data surprises
Despite the downside surprise to UK GDP in October, which suggested that economic activity is broadly flatlining, the BoE’s decision on Thursday is also expected to see policy left unchanged, with a likely vote of 8-to-1 in favour of keeping Bank Rate steady at 4.75%. Certainly, the majority on the MPC might conclude that the recent GDP forecast error will not be sufficient to have a material impact on its baseline inflation outlook, which was conditioned on four 25bp reductions in rates over the coming year, and foresaw inflation remaining around 2½%Y/Y over coming quarters before returning back to the 2.0% target by mid-2027. The MPC’s concerns about inflation persistence might be maintained by data showing still-elevated wage growth (tomorrow) and pickup in inflation (Wednesday). But if the dataflow surprise to the downside, Dhingra might well be joined by new external member Taylor or Deputy Governor Ramsden in voting for a cut. And given that the monetary stance is still significantly restrictive, we think the risks of inflation persistence are now overdone and would be sympathetic to a rate cut this week.


Key economic data

Today:
The flash December PMIs on the whole signalled minimal improvement in euro area conditions heading into year end, remaining broadly consistent with an absence of economic growth momentum. Admittedly, the euro area services PMI unexpectedly signalled a return to modest growth territory (51.4), led by the region excluding Germany and France, for which the respective index jumped 2.6pts to a six-month high (54.2). But with the manufacturing output PMI down to a 12-month low (44.5), the euro area composite PMI (up 1.2pt to 49.5) failed to fully reverse the drop in November. This left the composite PMI in Q4 1pt lower than in Q3 at 49.3, reinforcing the likelihood that GDP growth will slow sharply this quarter. In contrast, the UK composite PMI merely moved sideways in December (50.5) having declined in the previous three months. Like in the euro area, a modest improvement in services activity (51.4) was offset by a further significant weakening in manufacturing output (45.7). This left the quarterly composite index down more than 2pts from Q3, and barely in expansionary territory (50.9), but perhaps not weak enough to trigger a rate cut this week. However, the drop in the composite employment index – to a four-year low of 45.8 – will undoubtedly feature in this week’s discussions about labour market developments. In Asia, Japan’s flash composite PMI rose to a three-month high (50.8) supported by an acceleration in services activity (51.4). And contrasting an implied decline in demand in the euro area and UK, new orders in Japan accelerated in December.

Tomorrow:
Focus in the UK’s labour market report will be private sector wage growth. But after private sector regular pay growth moved sideways (4.8%3M/Y) in September, the strength of October’s PAYE data (6.3%3M/Y) flags the potential for a moderate increase in October’s ONS wage data, broadly in line with the BoE’s projection. Euro area goods trade figures for October as likely to report a narrowing in the trade surplus, while Germany’s ifo survey will provide a further update on business sentiment at the end of the year, including conditions in the construction and retail subsectors. Meanwhile, US retail sales (0.8%M/M) are expected to be partly boosted by higher gasoline prices and sales of new autos. But even excluding autos and gasoline, sales (0.4%M/M) are expected to have benefitted from solid Black Friday spending.

Wednesday:
The UK’s CPI report is expected to show headline inflation rising 0.3ppt to an eight-month high of 2.6%Y/Y in November, 0.2ppt higher than the BoE’s projection. This will in part reflect higher petrol prices and core goods inflation. But services inflation is expected to be broadly more stable, and the BoE projected a marginal softening in November, down 0.1ppt to 4.9%Y/Y. Final euro area HICP figures will likely confirm that headline inflation rose 0.3ppt to 2.0%Y/Y in November, due to higher energy prices. But euro area core inflation moved sideways at 2.7%Y/Y for a third consecutive month. Meanwhile, Japanese goods trade data for November are also due.

Thursday:
Sentiment surveys will dominate the European dataflow, with the German GfK consumer confidence expected to report only a modest improvement from the seven-month low reported previously. The French INSEE business sentiment survey – a more reliable guide to French GDP growth than the PMIs – is expected to report that the headline index moved sideways in December at 94, some 4% below the long-run average. Meanwhile, updated US GDP figures for Q3 are expected to report that annualised growth was little changed from the previous estimate of 2.8%Q/Q.

Friday:
A busy end to the week includes the closely-watched US PCE deflators for November. CPI and PPI results suggest well-behaved increases of 0.2%M/M for both the headline and core PCE price indexes. The projected readings would translate to annual increases of 2.5%Y/Y for the headline (versus 2.3%Y/Y in October) and 2.9%Y/Y for the core index (versus 2.8%Y/Y in October). In Japan, CPI inflation is expected to report a notable increase in November, with the headline rate up 0.6ppt to 2.9%Y/Y. The pickup in part reflects a rollback in the government’s energy subsidies. But services inflation is also expected to maintain an upwards trend. Indeed, the BoJ’s preferred core CPI rate is expected to rise 0.1ppt to a seven-month high of 2.4%Y/Y. Meanwhile, the European Commission’s preliminary consumer confidence indicator for December, which fell back sharply last month – from a more than 2½-year high to a 5-month low (of -13.7) – in response to rising political uncertainty in France and Germany and concerns about events in the US, is also due. Finally, UK retail sales data are expected to flag a downturn in sales volumes in the lead up to Christmas, not least due to the Black Friday discounting period falling into December’s sampling period this year

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