The Zhitong Finance App learned that this week can be called “Supercentral Bank Week” — the US, Japan, and the European Central Bank will hold monetary policy formulation meetings one after another. Among them, the US Federal Open Market Committee (FOMC), where the market is most focused, will announce interest rate decisions and monetary policy statements on Wednesday (Thursday at 2 a.m. Beijing time) local time. According to the unanimous expectations of Wall Street fixed income strategists, the three central banks may keep interest rates unchanged at the same time this week, but what the market is really concerned about is how far the austerity will go after the suspension.
The Federal Reserve will announce its resolution on October 28, local time in the US, and the ECB and the Bank of Japan will announce their decisions on the 29th and 30th, respectively. Mainstream market expectations are that the Federal Reserve will maintain the federal funds rate target range of 3.75% to 4.00%, the ECB will maintain a deposit mechanism interest rate of 2.50%, and the Bank of Japan will maintain a policy interest rate of 1.25%. The three are facing energy inflation and financial market fluctuations, yet none of them have clearly put an end to interest rate hikes.
CNBC's economist survey data revealed that the Bank of Japan's current meeting may adopt a typical “hawkish hold” (Hawkish Hold): that is, all 16 economists surveyed expect the Bank of Japan's monetary policy to remain on hold this week, and all expect Bank of Japan officials to pave the path of interest rate hikes in December or January next year and make expected management language; 13 of them expect the Bank of Japan's terminal interest rate to reach 1.75% to 2% around mid-2027. This means that market discussions have moved from whether to further normalize to the speed and end point of interest rate hikes.
What determines the future direction of the Bank of Japan's monetary policy is whether the source of inflation continues to change. Japan's core inflation excluding fresh food rose to 2.1% year on year in September, and real wages increased 1.5% year on year in August, rising for eight consecutive months. Imported energy and the depreciation of the yen drive up costs, while wage growth may enhance the sustainability of inflation through consumer demand and service prices. If the Bank of Japan changes the latest trend judgment on potential inflation from “close to 2%” to “reaching 2%,” the policy basis for further interest rate hikes will be strengthened; this suspension mainly reflects the observations of Bank of Japan Governor Ueda Kazuo and other decision makers on policy transmission and the sustainability of the bond market.
CNBC Economist Survey: The Bank of Japan is expected to keep interest rates unchanged this week, but maintain a hawkish stance
According to a CNBC survey, the Bank of Japan is expected to keep the policy interest rate unchanged at 1.25% during the two-day meeting ending on Friday, but there is still a high possibility that interest rates will rise in the next few months.
Considering that the Bank of Japan just raised interest rates to the highest level in 31 years last month, all 16 respondents expected the bank to stand still this time. All interviewees said that as domestic inflation and wages continue to rise, they expect the Bank of Japan to lay the foundation for interest rate hikes in December this year or January next year.
Homin Lee, senior macro strategist at Swiss Bank Lunar Bank, said that macroeconomic factors support the Bank of Japan's further policy tightening. “However, given the fragility of the domestic bond market, there may not be enough consensus within the policy committee on continuing interest rate hikes,” he added.
Sosuke Nakamura, a senior economist on Citigroup's research team, said he has yet to see clear signs that inflation has accelerated enough to support continuous interest rate hikes.
Japan's core inflation, which excludes fresh food, rose 2.1% year on year in September, reaching the highest level this year. A weak yen pushes up import costs, and higher energy costs are also transmitted to commodity prices, even though government subsidies have put some of the pressure on consumers to increase energy prices.
According to the latest government data, Japan's inflation-adjusted wages rose 1.5% year on year in August, increasing for the eighth month in a row. This also sends a signal that wage growth may drive inflation.
According to reports, Japan's Finance Minister Katayama Satsuki told lawmakers last week that Japan “is on the threshold of shifting to a period of continuous inflation driven by rising wages,” while admitting that rising import costs are also driving up prices.
According to a summary of economists' expectations from Reuters and The Japan Times, they agree that the Bank of Japan will announce at this meeting that its 2% “potential inflation” target has been met.
Ryutaro Kimura, a senior fixed income strategist at BNP Paribas Asset Management, said he is observing whether the Bank of Japan will change the statement about inflation from “potential consumer price index inflation has been approaching 2%” to “it has reached 2%” in this week's monetary policy statement.
As for the yen, nine respondents expect the dollar to trade in the 157-158 range against the yen in the next month. Respondents' predictions of the yen exchange rate after three months were more scattered, ranging from 150 to 160.
Masahiko Loo, senior fixed income strategist at State Street Investment Management, said, “The normalization of the Bank of Japan's policies, the increase in domestic yield, and changes in institutional capital flows should gradually reduce interest spreads and drive capital back to Japan.” But he added: “High US yields will prevent the yen from rising in a straight line.”
Last week, popular stocks related to the AI computing power theme and the technology stock market were sold off, triggering safe-haven demand. The yen strengthened against the US dollar, and the yield on Japanese treasury bonds declined. This reverses the trend earlier this month: at the time, Japanese Prime Minister Takaichi Sanae's spending plans and global bond sell-offs put pressure on the yen and Japanese treasury bonds.
Nine respondents said they expect the yield on the benchmark 10-year Japanese treasury bond to reach 3% — 3.1% by the end of the year, up from the current 2.809%. Seven respondents expect the yield on 30-year Japanese Treasury bonds to rise to 4% — 4.1% from 3.829% on Tuesday.
The background of this forecast is that analysts expect the Bank of Japan to resume tightening policies after being temporarily put on hold in October.
Takuji Aida, Japan's chief economist at Crédit Agricole, said that the next rate hike may occur in January, when the Bank of Japan plans to release a quarterly outlook report evaluating economic activity and prices.
Thirteen respondents said they expect the terminal interest rate — the level the Bank of Japan expects to end the current austerity cycle — to reach 1.75% — 2% around mid-2027.
Masato Koike, senior economist at Sompo Institute Plus, said that macroeconomic data shows that policy interest rates are close to a neutral level of 2%, and 2% is also the Bank of Japan's inflation target. But he said, “Given the state of the Japanese economy and the need to avoid excessive downward pressure on growth, I expect the Bank of Japan to stop raising interest rates when they reach around 1.75%.”
From October 14 to 26, CNBC conducted this survey on the expectations of the Bank of Japan's interest rate hikes on the 16 senior economists and fixed income strategists mentioned above.
Goldman Sachs draws policy boundaries: further tightening of financial conditions does not equal completion of the task of raising interest rates
Wall Street financial giant Goldman Sachs's latest judgment shows that the Federal Reserve suspended interest rates in October and raised interest rates again in December, reflecting a slowdown rather than a shift to easing. Goldman Sachs strategists said that its Financial Conditions Index (FCI) has been tightened by about 30 basis points since September; Goldman Sachs believes that the overall tightening is only slightly higher than that usually associated with a rate hike, which is not enough for the Federal Open Market Committee (FOMC) to see it as a replacement for further interest rate hikes. The 30 basis points here are changes in comprehensive financial condition indicators; it cannot be directly assumed that policy interest rates have been raised by 30 basis points.
However, Goldman Sachs did not agree with the most hawkish path of continuing to raise interest rates one after another. It is expected that tariffs, energy shocks, and AI-related price pressure will gradually weaken, so the benchmark scenario does not include interest rate hikes in March 2027, and there is still room for future interest rate cuts; if inflation is stronger than predicted, especially if the Iran conflict causes oil prices to remain higher than their assumptions, further interest rate hikes may re-enter the benchmark judgment. Goldman Sachs's latest position on the Federal Reserve's monetary policy can be summarized as follows: the recent suspension is not enough to announce the end of austerity, and current inflation is not enough to prove that interest rate hikes must continue indefinitely.
This made this week's equity and bond exchange transactions focus on changes in policy paths compared to existing pricing. If the three central banks reinforce subsequent interest rate hikes, short-term yields are more likely to rise, and the valuation of long-term growth stocks and new financing for AI projects will continue to be under pressure; if the inflation outlook improves and the number of future interest rate hikes is lowered, it will help ease the pressure on discount rates.
For the Japanese financial market, where safe-haven value has recently been highlighted, an increase in domestic yields may increase the attractiveness of domestic bonds and support the return of some capital, but the yield on US bonds is also high, and the yen may not necessarily rise unilaterally as a result. In the CNBC survey, the one-month USD/JPY forecast focused on 157-158, but the three-month forecast was scattered to 150-160, reflecting this uncertainty about relative interest rates and capital flows.