NewsBank of Japan ends negative rate era with cautious hike, global contrast

Bank of Japan ends negative rate era with cautious hike, global contrast

Bank of Japan raises interest rates
Bank of Japan raises interest rates
Images source: © Getty Images | Bloomberg
5:06 PM EDT, March 19, 2024

The Bank of Japan (BOJ) raised its main interest rate on Tuesday from minus 0.1 percent to a range of 0-0.1 percent, marking its first hike since 2007 and ending the era of negative rates, a policy Japan was the last in the world to abandon. This move proved more hawkish than many experts had expected.

According to the statement released after the Monetary Policy Board's two-day meeting, the Bank of Japan will maintain a cautious approach. Interest rates are to stay low to bolster the still "fragile" economic growth. This indicates that Tuesday's increase does not signal the start of an aggressive tightening cycle such as those recently observed in the United States and Europe, keeping Japan as the country with the lowest interest rates globally.

Bank of Japan Raises Interest Rates

The decision was nearly unanimous, with 7 out of the 9 Monetary Policy Board members voting for the increase to the 0-0.1 percent range. This move also marks a significant development under the leadership of the new BOJ President, Kazuo Ueda, who assumed the role in April.

The bank's decision was influenced by consistent economic indicators. The core inflation rate, a primary focus for the BOJ, has been at or above 2 percent for 22 months. This trend is expected to continue, supported by the latest consumer price data.

Experts, as reported by the Bloomberg news agency, note that the Japanese central bank abandoned some unconventional monetary policy tools, notably the yield curve control of government bonds, though it plans to continue bond purchases at the current rate of 6 trillion yen ($47.8 billion USD) monthly.

The financial markets had a mixed reaction to the BOJ's decisions. The Japanese stock index, Nikkei 225, initially dropped but then recovered, surpassing the 40,000-point mark. Meanwhile, the yen weakened against the US dollar, dropping by approximately 0.9 percent to 149.92 to the dollar.

End of the Low Rate Era

Ueda, the first BOJ head from the academic realm, had earlier hinted at a shift from ultra-loose policies. With minor adjustments made to the yield curve control program in July and October, few anticipated his ability to move away from several controversial policies so quickly.

Analysts believe the rate hike will not adversely affect the economy, allowing Japan to continue stimulating productivity and domestic demand.

When rumors of a possible rate hike surfaced in the fall, Polish experts weighed in, highlighting the significance for Japan, a country that had not raised interest rates in 15 years and had not seen rates over 2 percent in more than three decades, according to commentary from XTB analysts.

Major Economies to Cut Interest Rates

In contrast with Japan, the world's major economies are poised to reduce interest rates soon, according to the Polish Economic Institute. The FED is expected to initiate this trend in the summer, with the European Central Bank likely to follow.

PIE analysts foresee a cautious approach to rate cuts, anticipating about 3-4 reductions. Future contracts suggest that the main ECB rate could fall to around 3.5 percent by the year's end, with the Fed rate potentially nearing 4 percent. The motivation behind loosening monetary policy in the euro zone stems from weak economic activity, while the situation in the United States presents a more complex picture due to varied macroeconomic indicators.

Interest Rates in Poland to Remain Unchanged?

The Polish Economic Institute predicts a period of stabilization for Polish interest rates in the upcoming months, possibly including a 25 basis point reduction in November. But is this a feasible scenario?

Adam Glapiński, President of the National Bank of Poland (NBP), has hinted that discussions on rate cuts in Poland might only commence in the latter half of the year. Any actions by the Fed and ECB are unlikely to directly influence the MPC's decisions, although they could impact the Polish economy, potentially strengthening the zloty.

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