Key facts
- The Bank of Japan raised interest rates, marking its second hike in three months.
- The yen weakened as the BOJ's rate hike was perceived as less hawkish than expected.
- The prospect of a new global interest rate-tightening cycle is coming into view as central banks raise rates to tame inflation.
- The Bank of England left rates unchanged but flagged that inflation pressures could require further action.
- US central bank chief Kevin Warsh noted that broad financial conditions were not restrictive.
- Updated quarterly economic projections showed 16 of 18 Fed policymakers anticipate at least one more quarter-percentage-point hike by the end of this year.
The Bank of Japan raised interest rates for the second time in three months, but the move was less hawkish than anticipated, leading to a weakening yen. This decision comes as other major central banks, including the U.S. Federal Reserve, the European Central Bank, and the Bank of England, are expected to implement further rate hikes. Japan's tightening pace is significantly slower than its global counterparts, with only two additional hikes anticipated for the country.
BOJ Governor Kazuo Ueda's upcoming news conference will be closely scrutinized for any signals that might influence market expectations regarding future policy. The prospect of a new global interest rate-tightening cycle is coming into view as central banks raise rates and signal more may be needed to tame inflation fuelled by the Iran war. Key rates are already much higher than the rock-bottom levels from the last hiking cycle that began in 2022. But central bankers are under market pressure to show that they are prepared to raise them further to tame inflation expectations and rein in long-term bond yields at multidecade highs.
The Federal Reserve raised rates two days before the BOJ, with new U.S. central bank chief Kevin Warsh noting that broad financial conditions were not restrictive. Updated quarterly economic projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year. The European Central Bank raised rates last week, and while the Bank of England left rates unchanged this week, Governor Andrew Bailey flagged that inflation pressures could require further action.
In geopolitical developments, crude oil prices hovered just above $100 a barrel, up nearly 15% this month. The shift in central bank policy contrasts with the mood barely a month ago, notably after a short-lived pact between the United States and Iran that encouraged investors and policymakers to bet on easing hostilities and a retreat of energy prices. The collapse of that agreement and the recent Houthi advance along the Red Sea coast marking a new threat to global oil supplies have changed the outlook significantly. China privately asked Tehran to help rein in Yemen's Houthis following an appeal from Saudi Arabia.