This Is Fine


Image source: Gemenacom, Nikita G. Bernadsky - Shutterstock, Giphy

What's going on?

The Bank of Japan (BoJ) and the Bank of England (BoE) both left their respective countries’ interest rates where they were on Thursday – but each of them is staring down completely different economic problems.

What does this mean?

Japan’s key interest rate is currently negative: its central bank’s been trying to boost stubbornly low inflation in the country for six years now, without much success. Further rate cuts are a potential solution, but they’d come at a cost to the country’s banks, whose earnings fall when rates are lowered.

The UK’s main interest rate is the right way up at 0.75%. But it’s also in a holding pattern – thanks to, you guessed it, Brexit. If the current uncertainty about if, when, and how the UK will leave the European Union continues to weigh on Britain’s economy, the BoE reckons a rate cut is likely to follow.

Why should I care?

For markets: Any exports in a storm.

The BoJ is probably hoping a recent consumption tax hike won’t hamper Japan’s economy too much and will instead spur inflation. But with global growth sliding toward Hades and a strong yen making Japanese products appear more expensive to foreign buyers, there’s not been as much demand as hoped for the country’s exports. If there’s no improvement, the BoJ may cut rates next month anyway – or temporarily abandon its inflation target, as it considered doing last year.

The bigger picture: Brexit could send rates either way.

The BoE’s likely to gradually raise British interest rates in the event of a minimally disruptive Brexit, as it expects renewed certainty to drive up demand. But it’s likely to cut them if the UK unexpectedly leaves the European Union without a deal in place, given that it’d probably (at least initially) make cross-border trade trickier and more expensive. In the meantime – and as the BoE expected – the UK economy is languishing: new data on Thursday showed retail sales dropped unexpectedly last month.

Originally posted as part of the Finimize daily email.

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