Will the Bank of Japan finally raise interest rates?

Investors are waiting to see if the Bank of Japan will lift interest rates next week, in a move that would end its eight-year experiment with sub-zero borrowing costs.

The Japanese central bank is also expected formally to abandon its policy of capping the yields of 10-year Japanese government bonds, although analysts believe it is likely to stress that it will continue to buy JGBs to limit the impact on financial markets. 

The policy meeting comes after large Japanese companies agreed to increase wages by 5.28 per cent during this spring’s pay negotiations, the biggest increase since 1991. BoJ governor Kazuo Ueda has long argued that more evidence of wage growth is needed before the central bank becomes confident enough about sustainably achieving its 2 per cent inflation target. 

The rate decision is likely to be a close call, with UBS expecting the BoJ to keep policy on hold until April. Despite the robust outcome of the wage negotiations, economic performance has been weak due to sluggish consumption. 

UBS economist Masamichi Adachi said there were still uncertainties as to whether Japan’s inflation, which is well beyond its peak, will be sustainable. 

“Is the wage growth acceleration really leading to an acceleration in service inflation?” Adachi wrote in a report. “We do not think Japanese inflation expectations are anchored at 2 per cent.” 

That is likely to mean that rates stay very low for the foreseeable future and BoJ officials do not see the first rise as a signal that more will quickly follow. Kana Inagaki

What will the Fed say about the path of interest rates?

Interest in the Federal Reserve’s latest policy meeting next week will focus on the so-called “dot plot”, which will show whether officials still expect to cut interest rates three times this year. 

After the Fed surprised markets in December with its projections, traders had been betting by the start of this year that it would be forced to cut rates much faster — between six and seven times in 2024, with the first cut as soon as March.

However, those estimates have been drastically cut back in recent weeks as inflation’s move down has slowed, and no cut is now expected this month.

Headline consumer price inflation has been hovering just above the 3 per cent mark since October. Meanwhile the rise in core consumer prices — a metric that strips out the volatile food and energy sectors — has slowed, though progress this year has been minimal. 

As of Friday, traders in the futures market were pricing in just three quarter-point cuts this year, in line with the Fed’s forecasts from its December dot plot. 

“My forecast is that the Fed will continue to show three cuts in the coming year, but there is some question about whether the median dot will show two or three,” said Eric Winograd, head of developed market economic research at AllianceBernstein. Kate Duguid

Will the Bank of England hint at interest rate cuts? 

The Bank of England is forecast to keep interest rates at 5.25 per cent for a fifth consecutive meeting on Thursday, but rate-setters could soften their guidance if there are signs of inflation falling faster than it had expected. 

At the BoE’s February meeting, two of the nine-member monetary policy committee voted for a rate rise and one voted for a cut, with the other six opting to keep rates on hold. Investors expect at least seven votes in favour of no change in policy next week, with any deviation having the potential to move markets. 

Many analysts expect the bank to maintain its hawkish stance in policy guidance, given that multiple committee members have said that, while there has been progress in taming inflation, they need to see more evidence that it will stay low before starting to cut. 

But that could change on Wednesday when February inflation figures are published. Analysts expect the annual inflation rate to fall to 3.5 per cent in February from 4 per cent the previous month. 

“Our baseline is that policy guidance will be unchanged, although a particularly weak inflation print . . . may give members enough conviction to soften language further,” said Jack Meaning, an analyst at Barclays.  

This week official figures showed that UK wage growth slowed slightly more than expected in the three months to January but remains high at 5.6 per cent. The BoE has made it clear that even though inflation is likely to fall to, or even below, its 2 per cent target within the next few months, it still thinks there are underlying price pressures in the economy. Mary McDougall