Daily Insight
Group Economics Macro & Financial Markets Research
02 November 2016
BoJ accepts lower inflation Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
BoJ view: Lower inflation projections - The BoJ kept interest rates and asset purchases unchanged on Tuesday. At the same time, it released its new economic forecasts, which suggest that inflation would reach the target around fiscal year 2018. That is the time that Mr. Kuroda will end his term. This suggests that the BoJ is willing to tolerate lower inflation for longer. Initially the central bank had communicated that they would reach this goal, two years after they made the announcement in 2013. The inflation forecast was lowered from 0.1% to -0.1% for the current year and from 1.7% to 1.5% for FY 2017. As for GDP growth, the outlook was unchanged at around 1%-1.5% in FY 2017, this is higher than trend growth of around 0.5%. The current monetary policy of the BoJ is focused on targeting 10y yields at 0%. The BoJ has communicated that this would continue to mean purchases of broadly 80 trillion yen a year, to achieve the target level of the long-term interest rate. The statement of the BoJ signalled that the balance of risks was skewed to the downside. We continue to think that the BoJ will need to step up its monetary stimulus next year in order to get the economy back on track. (Maritza Cabezas) Global Macro – China’s Manufacturing PMIs jump to highest level since July 2014 China’s manufacturing PMIs provided yet another sign of an improving global growth momentum. After strong releases of the flash PMIs for the US, the eurozone and Japan last week, both China’s official manufacturing PMI as well as Caixin’s index jumped to 51.2 in October, the highest level since July 2014. For both indices, the output and new orders components showed strong gains. NBS’s export subindex improved sharply to 51.4 (September: 48.3), but Caixin’s equivalent fell back somewhat to 49.7 (September: 50.1). This suggests that large companies/SOEs, better represented in the official index, seem to profit more from an improvement in external demand than SMEs. You can find more detail on our views on the Chinese economy in our research note China Watch – Growth steady at 6.7% yoy in Q3. Meanwhile, India’s manufacturing PMI rose by 2.3 point to 54.4, the highest level since December 2014. The PMI index of Taiwan, a global bellwether, rose to a twoyear high of 52.7, with the export subindex up almost 2 points, to 54.2. Together with recent global trade data from the Dutch CPB, these numbers suggest that global trade may finally start to improve moderately from its recent doldrums on the back of a strengthening global manufacturing cycle. (Arjen van Dijkhuizen) BoE preview: Policy rate and QE seen on hold – The BoE meets to set monetary policy on Thursday against the background of updated growth and inflation forecasts in its lat est Quarterly Inflation Report. We expect it to keep the Bank Rate unchanged at 0.25% and its target for asset purchases steady at GBP 435 bn. At the time of the last Inflation Report in August, most MPC members judged that if the economic outlook confirmed its projections, that a further cut in the policy rate would prove necessary. However, the outlook has changed since then. First of all, economic data suggest that the economy has proved to be more resilient than expected. After initial sharp falls in the aftermath of the EU referendum, business and consumer surveys bounced back strongly. In addition, Q3 GDP was relatively robust. These numbers point to the likelihood of an upward revision in the BoE’s growth projections. Another important factor is the sharp fall in sterling. It points to a sharper
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Daily Insight - BoJ accepts lower inflation - 02 November 2016
acceleration in inflation than at the time of the August Inflation Report as import prices are set to surge and this will feed through into consumer prices. Indeed, Governor Mark Carney remarked recently that there are limits to the extent that the MPC can look through abovetarget inflation. (Nick Kounis)
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Daily Insight - BoJ accepts lower inflation - 02 November 2016