Central banks are to take center stage in the next week, although policymakers are likely to remain cautious as they wait for the aftershock of Britain’s vote to leave the EU to subside. Central banks have avoided action since Britain’s June 23 referendum, leaving the burden on governments to chart a plan of action. The U.S Federal Reserve is to keep interest rates on hold, acknowledging improves economic prospects. The next move is seen as an increase in rates, but even despite the Brexit ease, the U.S election drawing closer will push back the possible hike towards the end of the year.
Still, the U.S economy remains solid with second-quarter figures expected to show annual growth rate accelerating to a healthy 2.6 percent, from 1.1 percent three months earlier. Economic data has been on the upside, suggesting a solid growth momentum as we enter the third quarter. For the Bank of Japan, next Friday’s rate decisions will simmer with markets as they speculate an ease in policy, while the country currently struggles with low inflation. Prime Minister Shinzo Abe is working on a stimulus package with a headline of 20 trillion yen, potentially taking pressure off the BOJ, which had been criticized earlier in the year for cutting rates into the negatives. For now, analysts expect the bank to expand its asset purchases, cutting its key rate from -0.1 percent to -0.2 percent.
In Europe, all eyes were on Italian lenders as the release of the banking stress test results noted them as the weakest due to their low profitability and their massive non-performing loans of 360 billion euros, a legacy of Europe’s debt crisis. Second-quarter euro zone and British GDP figures will be an interesting read, although their numbers will be less relevant as they are still in the midst of the Brexit decision.