BoJ Hikes Key Rate Ahead Of Fed Announcement

(RTTNews) - The Bank of Japan raised its benchmark rate unexpectedly and also outlined its tapering plans on Wednesday ahead of the Federal Reserve's monetary policy announcement.

The policy board voted 7-2 to lift the uncollateralized overnight call rate to around 0.25 percent from around 0-0.1 percent. The new rate is the highest since late 2008.

In a unanimous vote, the board decided to reduce the amount of its monthly outright purchase of government bonds to around JPY 3 trillion by the first quarter of 2026. Currently, the bank purchases around JPY 6 trillion bonds per month.

BoJ's decision came ahead of the monetary policy announcement by the US Federal Reserve. The Fed is set to keep its key rate unchanged today but keep the door open for a rate cut in September.

The BoJ had ended its negative interest rate policy in March. Japan's monetary policy tightening comes in contrast to the stance of other major central banks that resorted to easing this year.

In the quarterly report, the BoJ said inflation for the fiscal 2024 is seen at 2.5 percent, which was down from 2.8 percent projected in April. The new forecast is lower mainly because of measures taken by the government to push down energy prices.

Meanwhile, the outlook for 2025 was lifted to 2.1 percent from 1.9 percent. The fiscal 2026 inflation forecast was retained at 1.9 percent.

Due to the statistical revision to the GDP figures for the fiscal 2023, the bank downgraded its growth outlook for the fiscal 2024 to 0.6 percent from 0.8 percent. Projections for both the fiscal 2025 and 2026 were maintained at 1.0 percent. Capital Economics' economist Marcel Thieliant said the BoJ is set to deliver another rate hike at its October meeting.

However, in contrast to what financial markets are pricing in, any further hikes next year are unlikely as underlying inflation will fall below the Bank's 2 percent target.

The slowdown in inflation this year will prompt trade unions to push for smaller pay hikes in next year's spring wage negotiations, Thieliant said. The other reason that helps to weaken underlying inflation is that the yen will strengthen in earnest as the Fed starts to ease policy.