BoJ to leave door open for rate hike in the spring

Emily Nicol
Chris Scicluna

Monetary policy

BoJ to leave rates unchanged and revise down GDP and inflation projections, but leave open the door to a spring hike
Given recent events in Japan – including evidence of weak consumer spending due to falling real incomes, a moderation in inflation, as well as the Noto Peninsula earthquake and suspension of production at Daihatsu Motors – any earlier expectations that the BoJ might lift rates tomorrow have long evaporated. Indeed, the BoJ will have to revise down its near-term projections for GDP and core inflation (excluding fresh food) when it publishes its updated Outlook Report. Our colleagues in Tokyo expect the BoJ’s GDP forecast for FY23 to be revised down from 2.0% to closer to 1½%. And they expect the core CPI forecast for FY24 to be revised down from 2.8% to about 2½%. But given that the downwards inflation revision will in part reflect energy prices, the ‘core core’ CPI forecast (excluding fresh food and energy) should be pretty much left unchanged at 1.9% in FY24 and 1.8% in FY25 – still within shouting distance of the inflation target. And the GDP projection for FY24 and FY25 (1.0% in both years) should also remain intact, consistent with ongoing moderate economic recovery. So, Ueda should maintain hopes that the conditions might soon be in place to allow a rate hike in the spring. He will, of course, insist that the BoJ needs more evidence that the virtuous cycle of output, income and prices continues to intensify, and that he will therefore want to wait for more data before pressing ahead with an end to negative rates. And he will continue to emphasise that what will matter most will be the strength of wage settlements in the spring and their impact on services inflation.

ECB to keep policy and guidance unchanged, but timing of first rate cut to dominate Lagarde’s press conference
Like in Japan, the main event in the euro area this week will be the ECB’s Governing Council meeting on Thursday. But like the BoJ, the ECB will leave its key policy parameters unchanged, with the forward guidance likely to retain the “higher for longer” message of previous policy meetings. As such, the greatest interest will be in the press conference, where the likely timing of the first rate cut seems bound to be a focus. Lagarde seems bound to reiterate that the ECB’s rate decisions will remain data dependent. And despite the decent possibility that the ECB’s inflation projections will be revised significantly lower in March, she will push back on any suggestions that rates could be cut as early as that month. Indeed, consistent with the concerns reported last week in the account of the December Governing Council meeting, Lagarde stated in her Bloomberg interview earlier last week that “it is not helping our fight against inflation if the anticipation [of future rate cuts] is such that they are way too high compared with what’s likely to happen”. This notwithstanding, Chief Economist Lane last week suggested that sufficient evidence might in due course be available to justify a first rate cut in June. And Lagarde also acknowledged to Bloomberg last week that a first cut by or in the summer looks “likely” to her. She seems likely to be asked to clarify that comment at this week’s press conference.

Data highlights


In a week dominated by sentiment surveys, tomorrow kicks off with the preliminary European Commission consumer confidence index for January, which should report a third successive monthly increase to the highest level since the Russian invasion of Ukraine, albeit remaining well below the long-run average. The ECB’s Bank Lending Survey results for Q4 are also due that day, giving insight on the transmission of the ECB’s rate hikes, which currently appears to have been more powerful than the Governing Council had anticipated. In Japan, the BoJ’s estimates of underlying inflation and findings of the Senior Loan Officer survey area also due, while in the US, the Philly Fed non-manufacturing and Richmond Fed business activity indices for January will be released.


A key focus will be the January flash PMIs from the major economies, with most expected to post a further modest improvement at the start of the year, supported by services activity. In the euro area, the composite PMI is expected to rise to a six-month high (from 47.4 in December), albeit remaining in contractionary territory, with the respective indices to remain consistent with negative growth in both Germany and France. In the UK, the composite output PMI is expected to edge slightly higher at the start of the New Year (to an eight-month high from 52.1 in December) suggesting a further modest recovery in economic momentum. The composite PMIs in Japan and the US are also expected to be little changed in January to imply moderately positive growth despite the ongoing contraction in manufacturing. Japan’s goods trade figures for December are also due.


The main data release will be the first estimate of US GDP in Q4. Daiwa America’s Lawrence Werther forecasts growth to have slowed sharply from 4.9%Q/Q annualised in Q3 to 1.5%Q/Q ann., admittedly this forecast sits at the lower end of expectations in the Bloomberg survey, but still implies a relatively strong performance given the notable headwinds facing the economy. And when excluding the likely drag from inventories and net drag, Lawrence expects domestic demand to be even firmer, supported by strong consumer spending. Advance goods trade and durable goods orders data for December will offer further insight into demand at the end of the year. In Europe, the German ifo, French INSEE and UK CBI distributive trades business survey results for January are also due.


The week will end with a number of top-tier releases from the major economies. Tokyo CPI figures for January are forecast to report a further moderation in headline inflation, by 0.4ppt to 2.0%Y/Y, which would be the lowest since March 2020 and 2.4ppts below lowest January’s peak. But when excluding energy and fresh foods, the BoJ’s preferred measure of core inflation is expected to have edged only slightly lower, by 0.1ppt to remain at a still elevated 3.4%Y/Y. In the US, personal income numbers for December might well be limited by the decline in aggregate hours worked that month, although consumption appears to have remained firm, supported by brisk spending on new cars and non-durable goods, as well as services. Meanwhile, the Fed’s preferred inflation measure – the core PCE deflator – is expected to rise 0.2%M/M, less than the rise in core CPI that month. In the euro area, December’s monetary data will likely suggest that bank lending to firms and households remained very subdued at year-end, while the UK’s GfK consumer survey is likely to suggest only modest improvement in sentiment at the start of the year.

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