Week ahead: Fed, BoJ, BoE in Central Bank Bonanza

Here are the week’s key events:

Central banks dominate the markets this week with the Federal Reserve, Bank of Japan, Bank of England, Reserve Bank of Australia and Swiss National Bank all meeting to decide policy.  Whilst the Fed is expected to hold rates, there could be fireworks from the BoJ after the conclusion of wage negotiations that have produced the biggest pay rise for workers in 25 years. The SNB is the most likely to start cutting, though it may prefer to wait and see how inflation progresses.

Bank of Japan

The conclusion of wage negotiations in Japan has seen the biggest pay rises in 25 years, setting the scene for this week’s two-day meeting of the Bank of Japan which concludes Tuesday. Sources have indicated that there may be enough in the wage talks to justify a policy shift at its March meeting, though policymakers may choose to wait until April. "The outcome of this year's annual wage negotiation is critical” to deciding on when the BoJ should exit negative rates, Governor Kazuo Ueda told parliament last week.

Reserve Bank of Australia

No change is expected from the RBA on Tuesday, though more talk of possible hiking would be something for the market. The central bank left its benchmark rate at a 12-year high of 4.35% in February thanks to cooling inflation, but minutes of the meeting showed policymakers did discuss rate hikes. The RBA noted that "a further increase in interest rates cannot be ruled out”, but markets see this as positioning talk designed to prevent investors from pricing in too much easing this year.

Federal Reserve

Markets have all but priced out a cut in March after the last two inflation reports showed price growth still stubbornly above the Fed’s target, whilst the labour market has not yet cracked. Headline CPI rose by 3.2% YoY in February. Core CPI was still a very stubborn 3.8% YoY, from 3.9% YoY in January, while the ‘supercore’ inflation measure remained unchanged at 4.3% YoY. A cut in May is now increasingly unlikely with markets betting on June. So, the key question on Wednesday is what the Fed makes of these inflation figures and whether it’s going to sound more cautious than it did in December.

Bank of England

No change is expected on Thursday but the Office for Budget Responsibility forecasts inflation falling to 2% in the next couple of months, leaving the path clear for the Bank of England to move more swiftly towards cutting rates than some peers. Bank of England Governor Andrew Bailey said that the UK is “near or at full employment” and seems less worried about inflation. Wage growth has come down, too, as a cooler jobs report saw traders bring forward expectations for the BoE to cut in June from August. Markets will be waiting to see if the BoE is willing to lean into the idea of a June cut or retain a slightly more cautious outlook.

Swiss National Bank

The SNB could be the first to cut – CPI inflation fell to 1.3% in January vs a forecast 1.7%%, as it was in December. That surprise fall showed inflation undershooting the SNB’s forecasts for Q1, prompting many to speculate the central bank will cut this month. It may, however, to prefer to wait until the likely moves by the ECB and Fed in June.

Bank J Safra Sarasin chief economist Karsten Junius believes the SNB should go ahead and cut, saying an early move would be the “best insurance” against negative inflation. “The SNB has managed to bring inflation back into the target range. By cutting interest rates at its next policy meeting on March 21, it can help reduce the real overvaluation of the Swiss franc and support the economy’s return to potential growth,” he wrote on the Neue Zuercher Zeitung’s ‘The Market’ site.