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The Bank of Japan is widely expected to maintain interest rates below zero next week but investors will be hunting for crucial hints on its next policy advance.
BoJ governor Kazuo Ueda faces the tricky task of communicating future policy clearly to financial markets after its two-day meeting ends on Tuesday, especially since any change in his inflation outlook is likely to trigger a sharp advance in the yen.
Earlier this month, Ueda warned of an “even more challenging year” ahead for policy management, sending the yen to a four-month high of ¥141.6 per dollar.
His comments raised expectations that the BoJ would soon scrap its policy of holding interest rates below zero, although most major brokerages are not forecasting a policy revision until early next year or the spring.
Economists say the BoJ is expected to tread carefully, having not raised short-term interest rates since the summer of 2006. Before ending its negative interest rate policy, the BoJ is first likely to change its forward guidance on interest rates or furnish signals on policy change.
“There will be no surprise end to negative interest rates,” said Kazuo Momma, the former head of monetary policy at the BoJ who is now executive economist at Mizuho Research set up, adding that he expects an end to negative interest rates in April. Kana Ingaki
When will UK inflation data allow the Bank of England to cut rates?
Investors will be focused on UK inflation data on Wednesday for signs of how much the Bank of England could cut interest rates next year.
Economists polled by Reuters forecast that the headline rate of price growth will ease to 4.4 per cent in November from 4.6 per cent in the previous month.
Core inflation, which strips out the more volatile food and energy prices, is expected to slow to 5.5 per cent from 5.7 per cent in the previous month.
A sharper or more widespread refuse in inflation could prompt markets to price in more rate cuts by the BoE. As of Friday, markets were pricing in a 107 basis point fall in interest rates by the end of December next year for the BoE, 111 basis points for the European Central Bank and 148 basis points for the US Federal Reserve.
The BoE is particularly concerned about services sector inflation, which in the UK eased to 6.6 per cent in October, still much higher than the 4 per cent in the eurozone and the 5.2 per cent in the US. In the minutes of the BoE’s monetary policy decision on Thursday, in which the bank held interest rates unchanged at a 15-year high of 5.25 per cent, it noted that services price inflation “had remained elevated”, despite the fall in the headline rate.
Sandra Horsfield, economist at investment bank Investec, forecasts that headline inflation will slow to 4.3 per cent in November, helped by lower energy and food inflation.
She also expects some easing in core inflation to 5.5 per cent but noted that for the BoE “the downtrend trend in inflation is likely to be perceived as too gradual to allow for rate cuts in the very near term, especially considering the jobs market still looks reasonably robust.
“We continue to expect a first advance down in interest rates only in August 2024,” she said. Valentina Romei
Will the Fed’s preferred measure of inflation show price growth is cooling?
The core personal consumption expenditures index, the US Federal Reserve’s preferred measure of inflation, is expected to show that price rises cooled last month.
Year-over-year core PCE — which strips out the volatile food and energy sectors and which is most closely watched by the Fed — is expected to come in at 3.4 per cent, according to economists polled by Bloomberg, down from 3.5 per cent in October. Core PCE has fallen dramatically from a peak of 5.6 per cent last February, but remains above the Fed’s 2 per cent target.
Evidence of slowing core inflation may guide investors to enhance bets that the Fed will cut interest rates next year. At the bank’s meeting this week chair Jay Powell signalled that the Fed has finished raising interest rates this cycle. That suggests that officials are now more concerned with the risks of overtightening policy — and sending the economy into a recession — than the risks that inflation will speed up again.
Following this week’s meeting — which was accompanied by the Fed’s “dot plot” showing officials currently believe that interest rates may be cut three times next year — traders added to bets on cuts next year, pricing in as many as six by the end of the year.
Also released Friday will be personal income and expenditure data. Although holiday shopping typically boosts personal spending in November and December, Bloomberg forecasts show that personal spending is expected to be flat from the prior month at 0.2 per cent.
