The Reuters report is citing four sources familiar with the BOJ’s thinking, in saying that policymakers may slightly upgrade their inflation forecast for the fiscal year 2027 as rising oil prices continue to feed through to consumer prices. However, the central bank is still expected to leave interest rates unchanged at 1.25% on 30 October.
That is not all too surprising after the rate hike back in September. And in fact, traders are also pricing in virtually no chance of another rate hike for next week. As for December though? Well, that is a bit of a different story. Traders are assigning roughly 73% odds of another move in the final month of this year.
And that is what markets should be focusing on, rather than being distracted by the immediate outlook next week.
The report also suggests that policymakers are of the view that underlying price pressures haven’t changed materially, with little evidence of a broader wage-price spiral taking hold. In other words, it is to say that the BOJ isn’t necessarily all too worried about inflation running away just yet.
As such, policymakers are trying to imply that they do have some breathing room to assess the impact of September’s rate hike.
Having said that, the central bank may not have the luxury to keep getting away with this sort of move. Higher oil prices, coupled with the risk of further yen weakness, could keep imported inflation elevated for longer. And if those pressures start feeding into broader price expectations, that will spell trouble for the BOJ if they decide to sit on their hands for too long.
But even so, let’s be reminded of the fact that raising interest rates will do little to solve Japan’s plight. Another rate hike won’t help in creating more barrels of oil to address the supply issue. And with regards to the yen, it’s a slippery slope with the effectiveness of intervention efforts already proving to be rather questionable as of late.
For now though, markets are agreeing that the BOJ can afford to wait in October. The bigger question is whether the central bank can still afford to wait in December and also for next year, amid pressures of needing to step up the pace of policy tightening.
This article was written by Justin Low at investinglive.com.
