BOJ rate hike in October is real possibility, ex-official says
Faster rate hikes may be in store now as policy focus has shifted, says former executive director
Former Bank of Japan executive director Kazuo Momma has indicated that a second consecutive rate hike by the central bank could take place when the board convenes in October, a move earlier than many analysts anticipate. Momma, who previously oversaw monetary policy, suggested a likelihood of 20 to 30 percent for this occurrence.
Momma explained that the Bank of Japan had entered a new phase, transitioning from aims to boost underlying inflation towards the 2 percent target to preventing excess inflation. This shift in focus has led to a more frequent pace of rate increases, with the BOJ now considering hikes every three months rather than the previous six months.
He emphasized that the risk of inflation exceeding 2 percent remains significant, and this risk is not likely to diminish in the coming months. The recent acceleration in price trends, with the BOJ's inflation gauge excluding food and temporary factors reaching 2.6 percent in August from 2.3 percent in July, further supports this assessment.
Momma also highlighted that the current benchmark rate of 1.25 percent, while low, is still considered acceptable. He argued that given both the upside risks and the current rate level, the most compelling argument for the BOJ is to raise interest rates promptly. If implemented, this would result in the central bank's policy rate reaching approximately 2 percent by June or July 2027, with three more quarter-point increases.
However, the consensus among economists surveyed by Bloomberg suggests a more gradual approach, with the terminal rate estimated at 1.75 percent. Notably, September marked the first time all three major central banks, the BOJ, the US Federal Reserve, and the European Central Bank, increased rates in the same month. Following the BOJ's decision, the yen weakened, although this occurred despite the rate hike as two new board members voted against it.
Momma believes that dissents in future meetings are unlikely to alter the trajectory of BOJ rate hikes, and the Japanese government is unlikely to intervene to prevent normalization of the policy settings. Doing so could exacerbate yen weakness, which adds to inflationary pressures considering Japan's heavy reliance on imports for energy and food.
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