Central Banks Face Key Rate Decisions, Bank of Japan Maintains Ultra Dovish Stance
This week, the U.S. Federal Reserve, Bank of Japan, and European Central Bank (ECB) will all announce their interest rate decisions, potentially marking pivotal moments in their monetary policy trajectories.
The Federal Reserve, which concludes its monetary policy meeting on Wednesday, is expected to deliver a 25 basis point hike, bringing the target Fed funds rate to between 5.25% and 5.5%. This hike could potentially mark the end of a 16-month run of monetary tightening, as inflation and the labor market show signs of cooling. However, the debate going forward will focus on the guidance provided by the Fed, with analysts expecting policymakers to remain “data dependent” and push back against any talk of interest rate cuts in the near future.
The ECB, on the other hand, is expected to continue its run of interest rate hikes, with a more-than 99% chance of a 25 basis point hike at the conclusion of its policy meeting on Thursday. June consumer price inflation in the euro zone was at its lowest point since January 2022, but core inflation remained high, exceeding the central bank’s 2% target. ECB Chief Economist Philip Lane has warned against pricing in rate cuts in the next two years. Traders will closely analyze the ECB’s communication for indications of a bias towards tightening, neutrality, or a pause.
The Bank of Japan faces a different challenge. Despite consistently exceeding its inflation target and signs of an improving economy, the central bank is expected to maintain its ultra dovish stance with a -0.1% short-term interest rate target. Yield curve control (YCC) policy is also expected to remain unchanged. Some early speculation suggests the Bank of Japan may be forced to begin reversing its monetary policy, but the market currently prices in no revisions to rates or YCC. Barclays expects a shift away from YCC at the central bank’s October meeting.
Goldman Sachs economists note that the rate differentials between the U.S. and Japan’s central bank will persist as the Bank of Japan continues its ultra dovish policy. Overall, this week’s key interest rate decisions from the central banks will be closely scrutinized by economists and could have significant implications for the future paths of monetary policy.