The last BOE meeting showed a 5-4 vote in favor of leaving rates steady. BOE Governor Mervyn King voted for a hike and remains hawkish, the question is: can he convince the other policy makers to take action as well this time and keep the British Pound above 2.00?

BOE – Can Mervyn King Persuade The Majority To Hike?
ECB – All Hawks But No Hike
BOJ – Yen Remains A Low-Yielder, But For How Long?

Yield Spread Analysis 06/26 – 07/03

After the terrorist attacks in London and Glasgow over the course of the weekend, risk averse sentiment was cemented in the markets, helping to cool down swelling yields. Long term rates suffered the most, especially in Canada, as economic data that once signaled massive expansion and hot inflation has done an about-face, hurting prospects of a rate hike by the Bank of Canada next week. Long term rates in the US have been hurt as well, especially after the FOMC noted that core inflation had “improved modestly.” Nevertheless, short term rates stayed afloat as the bank also said that “sustained moderation in inflation pressures has yet to be convincingly demonstrated.” Meanwhile, the Swiss yield curve steepened somewhat as solid economic data keeps growth outlooks on track.

Looking ahead, the RBA, ECB, and BOE meetings provide triple the event risk for forex and bond markets alike this week. However, only the BOE is actually expected to hike and could lead to a spike in volatility for the British pound and Gilts. For more on this, check out our special report: Forex Update: Which Central Banks Are Still Raising Interest Rates?



BOE – Can Mervyn King Persuade The Majority To Hike?

The last BOE meeting showed 5-4 in favor of leaving rates steady. BOE Governor Mervyn King voted for a hike and remains hawkish, the question is: can he convince the other policy makers to take action as well this time?

Mervyn King, Bank of England Governor (Voted For June Hike)

“The upside risks are that intended price pressures are the result of pressures on capacity, which surveys have suggested have built up over the past year, or higher inflation expectations. The MPC will continue to monitor closely these indicators of pricing intentions, as well as nominal developments in the economy more generally.” – June 28, 2007

“The argument for moving sooner [on rates] rather than later is precisely to avoid having to engineer a major slowdown.” – June 28, 2007

John Gieve, Bank of England Monetary Policy Committee Member (Voted For June Hike)

“I voted for a further increase earlier this month partly because I was not convinced that current rates would be sufficient to bring credit growth and nominal demand back to their long-term sustainable path.” – June 26, 2007

Charles Bean, Bank of England Monetary Policy Committee Member (Voted For Steady Rates In June)

“The most serious risk is probably that the recent period of above-target inflation leads to inflation expectations becoming dislodged and higher inflation becoming embedded. A second risk is continued rises in commodity prices, including oil.” – June 28, 2007

Kate Barker, Bank of England Monetary Policy Committee Member (Voted For Steady Rates In June)

“A key risk is a marked loss of credibility in UK monetary policy indicated by a significant move upward by inflation expectations…an abrupt shift in the perception of risk in financial markets…could result in a marked increase in real long-term interest rates, linked to falls in bond, equity and house prices.” – June 28, 2007

Rachel Lomax, Bank of England Monetary Policy Committee Member (Voted For Steady Rates In June)

“The question last month was less why wait than what's the rush? The data we'd had on the month didn't suggest things were particularly worrying. There were some signs of softening...The big question for me is what effects the tightening in the pipeline is going to have. There are a lot of uncertainties about the outlook and I want to see more data before deciding whether rates need to go higher. There's been very little data published since the June meeting...I didn't think we needed a pre-emptive strike in June. There's a risk of overdoing it.” – June 28, 2007

Paul Tucker, Bank of England Monetary Policy Committee Member (Voted For Steady Rates In June)

“In April, I said that we were edging towards restrictive. In May, I was comfortable [with a hike]. When I got to June, I didn't think there had been sufficient evidence. Furthermore, I thought that an increase in June would mistakenly send the message that things are more difficult than I think they are.” – June 28, 2007

ECB – All Hawks But No Hike

ECB governing council members remain hawkish and still see room for monetary policy tightening. However, the lack of the use of the term “vigilance” regarding inflation makes it clear that a rate hike is not in the cards this week. Furthermore, ECB President Jean-Claude Trichet’s commentary following the rate announcement is unlikely to signal rate increases within the next few months:

Axel Weber, European Central Bank Governing Council Member

“While some wage increases are justified the agreements are higher than we anticipated in our projections.” – July 2, 2007

“Hedge funds enrich financial markets because they add liquidity, especially in developing markets. But they are using new financing tools with which we do not have much experience. To that extent they could pose a threat to financial stability…More transparency is needed with hedge funds through a voluntary code of conduct.” – July 2, 2007

Guy Quaden, European Central Bank Governing Council Member

“We have to closely monitor the risk for inflation that seems upward-oriented, and month after month we will assess the incoming data and prospects…Euro-zone growth continues to develop favorably which results in pressure on prices.” – June 27, 2007

Nout Wellink, European Central Bank Governing Council Member

“My personal feeling is the tightening has not yet come to an end. Whether we take steps will depend on incoming data. If necessary we will take steps…Inflation risks are on the upside and include oil price increases and increased capacity utilization.” – June 27, 2007

BOJ – Yen Remains A Low-Yielder, But For How Long?

With price growth remaining tepid, the BOJ has had no impetus to raise their ultra-low interest rates. However, monetary policy makers have made their desire to normalize rates very clear. Will the central bank wait for a return to positive inflation to take action, or will the completion of the LDP elections (and lack of government influence) be reason enough?

Toshiro Muto, Bank of Japan Deputy Governor

“As stated in the (bank's) outlook report (released in April), the BoJ will gradually adjust rates in tandem with the pace of an improvement in the economy and prices, and after confirming the likelihood that sustainable economic growth will continue under stable price conditions.” – July 3, 2007

Kiyohiko Nishimura, Bank of Japan Board Member

“The policy rate should be adjusted gradually to the trend of general economic conditions, and the timing of policy change should depend on the pace of economic improvement. To stand pat for a long period of time is not a prudent strategy, since the acceleration of economic activity may in the future come to require a large adjustment in the policy rate, causing unnecessary swings in economic activity and prices.” – July 3, 2007

Hidetoshi Kamezaki, Bank of Japan Board Member

“If it is confirmed that growth will continue after reviewing the economy and prices comprehensively, then we must take action promptly…If views that interest rates won't rise take root, then it could distort the forex market or asset prices.” – July 2, 2007

Hiroko Ota, Japanese Economics Minister

“Prices have not been responding well to a tighter demand-supply gap and wages are not responding well to tighter job market conditions. But the mechanism is still there, and eventually the tighter demand-supply gap and job conditions will push up prices and wages, although I don't know when.” – June 29, 2007

Yasuhisa Shiozaki, Japanese Chief Cabinet Secretary

“We think the BOJ will carry out policies that are in line with the government's economic policies, but that is their independent decision.” – July 3, 2007

“Looking at overall price movements, we maintain our view that the end of deflation is in sight.” – June 29, 2007

Terri Belkas is a Currency Analyst for FXCM.