BOJ Raises Rate to 31-Year High of 1.25%, Bank of England Halts Quantitative Tightening
The Bank of Japan raised its policy rate from 1% to 1.25%, a 25bp hike, today. The vote passed 7-2, with members Asada and Sato dissenting. The BOJ stated it would continue raising rates further if the economy, prices, and financial conditions evolve as projected, while adding that the timing and pace would be decided while monitoring risks. Japan's core CPI released today came in at about 1.9% year-on-year, with the need to keep underlying inflation from exceeding 2% cited as the background for the hike.
Analysis suggested that the fundamental reason behind Japan's rate hike is to defend against yen weakness. Because of the large interest rate gap between Japan and the US, funds have continued flowing from low-rate Japan into high-rate US assets, deepening yen weakness. However, since the US also raised rates just before Japan's decision, the rate gap either stayed the same or the dollar strengthened further, leading to an assessment that this BOJ hike alone will have limited effect in curbing yen weakness.
It was noted that the BOJ's pace of rate decisions is typically slow, roughly once every six months, making this hike, which came just three months after the last one, an unusually rapid adjustment. The market reportedly views this pace as still insufficient and believes consecutive further hikes are needed, with attention on whether Governor Ueda's press conference at 3:30 PM will send a clear signal on the pace of future hikes. Concerns were also raised that if no such signal emerges, yen weakness will not be curbed, but if it does emerge, it could reignite the issue of unwinding yen carry trades, as funds that had flowed out of Japan into the US and elsewhere reverse course.
Immediately following the decision, the dollar-yen rate quickly settled around 156 yen, having briefly dropped to 154-155 yen (yen strength) intraday before reversing higher again. It was noted that, given the yen's large weight in the dollar index, this could affect future trends, and remarks expected from Prime Minister Takaichi's 6:30 PM press conference regarding expansionary fiscal policy were also cited as a variable for weekend bond market moves.
The Bank of England held its policy rate hawkishly the previous day while also announcing a halt to gilt sales (quantitative tightening). This signals an end to the policy of absorbing liquidity by selling gilts into the market, which is seen as maintaining market liquidity and easing the burden of gilt supply, resulting in lower UK gilt yields. It was assessed that the UK, whose fiscal position is relatively unstable, aligning with efforts to stabilize its gilt market also contributed to broader stability in European and US Treasury yields.