As expected, the Bank of Japan left its key interest rate unchanged at 0.25% at the end of its meeting this morning. It's a way of acknowledging the current political risks, given the uncertain outcome of the parliamentary elections at home and the upcoming US elections, Commerzbank’s FX analyst Volkmar Baur notes.
“The Bank of Japan also left its economic forecasts pretty much the same as they were three months ago. Next year's growth was revised up a little, while inflation expectations for the coming year were revised down a little in the wake of lower energy prices. The Bank of Japan still thinks rates should go up if the economy keeps growing as expected.”
“We're still waiting to hear why. They're expecting growth of around 1% and inflation of 1.9%. Other central banks would probably be happy – job done – and would simply wait and see how the economy develops, in order to be able to react to any unforeseen events by tightening or loosening. It's not clear why they're pushing to raise interest rates when the forecasts show that price stability will be achieved.”
“I can see this desire to raise interest rates again leading to a further interest rate hike in December. This would also make the yen stronger in the meantime. I don't think there'll be any more interest rate hikes next year though, which should mean the JPY will start to weaken again.”
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