Japan to maintain ultra-low interest rate, UK is likely go for another hike

Last week, State Bank of Pakistan surprised everyone by maintaining policy rate at 22pc

TOKYO/LONDON (Reuters/Web Desk) – Two completely opposite approaches are on display with the Bank of Japan (BOJ) likely keep interest rates ultra-low while the UK’s central bank going for another rate hike, as the world grapples with the current economic crisis – which was ignited by the Covid pandemic and later exacerbated by the Russia’s invasion of Ukraine.

In this connection, Reuters in a report says the Bank of Japan will likely keep interest rates ultra-low on Friday and reassure markets that monetary stimulus will stay, at least for now, as China's economic woes and the global fallout from US interest rates cloud the outlook.

On the other hand, it is expected that the Bank of England will hike interest rates once again this week, possibly the last hurrah for one the great tightening cycles of the last 100 years as a cooling economy begins to worry policymakers, Reuters said in a separate news item.

Last week, the State Bank of Pakistan kept its key interest rate unchanged at 22 per cent, surprising analysts who had been expecting it to try to tame inflation and support the rupee with an increase of at least 150 basis points.

Read more: Pakistan vulnerable to inflation, high interest rate, rupee depreciation, low GDP

As far as Japan is concerned, Reuters says with rising raw material costs also keeping Japan's inflation above their 2pc target for more than a year, BOJ policymakers are increasingly talking up the need to shift away from the massive stimulus of the past decade.

Given uncertainty over the wage outlook, however, there is no consensus within the BOJ on when and in what order the bank ends negative short-term interest rates and a bond yield cap, say three sources familiar with its thinking.

Many central bank policymakers prefer to hold fire until there is more clarity on whether Japan's fragile economy can weather the hit from slowing US and Chinese demand, they say.

"Uncertainty over the global outlook is very high, posing a huge risk to Japan's economy," one of the sources said.

"The outlook for the global economy, particularly that of the United States, is crucial in determining whether Japanese companies can keep hiking wages next year," another source said.

At the two-day meeting ending on Friday, the BOJ is widely expected to maintain its short-term interest rate target of -0.1pc and that for the 10-year bond yield around 0pc.

Read more: Rate hikes: Many countries moving in opposite direction of US. Can Pakistan follow suit?

It is also seen leaving unchanged guidance pledging to keep intact its bond yield control policy until inflation stably hits the bank's 2pc target, the sources said.

Markets are focusing on whether Governor Kazuo Ueda will offer any fresh signals on the timing of a policy shift at his news conference scheduled after the meeting.

In an interview this month, Ueda said the BOJ could have enough data by year-end to determine whether to end negative rates, heightening market expectations the bank could push short-term rates to zero this year or early next year.

Read more: No interest rate hikes: Japan's July wholesale inflation slows for seventh month

That would be much sooner than estimates in a Reuters poll in August, when nearly 60pc of analysts expected an end to negative rates to come in "2025 or later."

Meanwhile, the Bank of England is likely to hike interest rates once again this week, possibly the last hurrah for one the great tightening cycles of the last 100 years as a cooling economy begins to worry policymakers.

All but one of 65 economists polled by Reuters in recent days predicted the BoE will raise Bank Rate to 5.5pc on Thursday from 5.25pc, which would mark its highest level since 2007.

Financial markets are less certain than economists – with rate futures on Friday showing a 25pc chance of a pause – but both are coming to the view that the streak of rises in borrowing costs since December 2021 is in its last days.

Goldman Sachs and Citi also expect Thursday's decision will be the BoE's last rate hike.

If Bank Rate does peak at 5.5pc – from a starting point of 0.1pc - it would rank fourth on the list of Britain's biggest tightening cycles of the last century, behind surges that took place in the late 1980s and in the early and late 1970s.

Read more: Why is UK food inflation so stubbornly high?

Recession accompanied all of those prior sharp increases in rates - and a downturn is increasingly on the minds of the Monetary Policy Committee (MPC), with the 14 rate hikes it has already made yet to fully feed through into the real economy.

Much of the data over the last week underlined Governor Andrew Bailey's comment this month that the BoE was "much nearer" to ending its tightening cycle.

Economic output in July dropped more steeply than expected, even if one-off factors like strikes were behind some of the fall, and the unemployment rate has already overshot the BoE's forecast for the third quarter as a whole.

The European Central Bank also cited a weak economic outlook when it hiked rates last week and signalled that would be its last such move in the current cycle.

But with inflation in Britain still running higher than in any other major advanced economy, the calculation for BoE officials is arguably more complex - with hot wage growth data in Britain still pointing to inflationary risks.

Inflation figures for August due on Wednesday are likely to buck the falling trend thanks to rising petrol prices.

Investors will be wary of the BoE's tendency under Bailey to react strongly to above-forecast inflation prints - an approach that some economists say has undermined its ability to deliver a consistent message and control market rates.

The MPC will also have advance sight of the closely watched S&P Global survey of businesses, due to be published on Friday.

The BoE will also update investors on plans to unload its vast stockpile of British government bonds in the year ahead - a process known as quantitative tightening.

Most economists think it will increase the pace of the unwind to around 100 billion pounds ($123.80 billion) per year, from 80 billion pounds over the last year.