Aussie rises on inflation printing

BoJ’s Himino signals willingness for further rate hikes

Bank of Japan (BoJ) Deputy Governor Ryozo Himino reiterated the central bank’s readiness to adjust its monetary policy stance, including potential interest rate hikes, if confidence in the country's economic outlook continues to strengthen. Speaking recently, Himino emphasized that should the BoJ develop “growing confidence” in its economic and inflation forecasts, it would consider “adjusting the degree of monetary accommodation,” hinting at the possibility of tightening monetary policy.

Himino laid out the BoJ’s baseline scenario for fiscal years 2025 and 2026, envisioning a “reasonably balanced state” where inflation aligns with the BoJ's 2% price stability target and economic growth exceeds its typical pace. However, he highlighted two risk scenarios: one where inflation remains persistently above 2%, and another where it falls significantly below 2% and struggles to rebound.

Addressing recent volatility in financial markets, Himino noted that the appreciation of the yen could help alleviate the import cost pressures that smaller businesses face. However, he acknowledged that a stronger yen might erode yen-denominated earnings for Japan’s export sector. Despite these challenges, Himino expressed confidence in the resilience and competitive strengths of Japanese firms. He further mentioned that while fluctuations in stock prices can affect market sentiment, they are unlikely to substantially dampen overall business confidence.

Australia’s monthly CPI eases to 3.5% in July

Australia's consumer price index (CPI) showed a slower pace of inflation in July, easing to 3.5% year-on-year from 3.8% in June, and coming in just above the expected 3.4% increase. The CPI measure, excluding volatile items and holiday travel, also moderated, dropping to 3.7% year-on-year from 4.0% in June. The annual trimmed mean CPI, a metric that filters out extreme price changes, similarly fell from 4.1% to 3.8% year-on-year.

In response to the inflation data, the Australian Dollar strengthened in the Asian trading session, as the less pronounced slowdown in inflation than anticipated reinforced the RBA's stance of holding interest rates steady. While the data alleviates some immediate pressure for an additional rate hike, it supports the view that the RBA will stick with its current monetary policy in the near term.

With these figures in mind, the Reserve Bank of Australia (RBA) will focus on the upcoming second-quarter GDP data, due for release on September 4. This data will provide critical insights ahead of the RBA's next policy meeting scheduled for September 23-24. Despite inflation pressures remaining relatively high, the RBA is expected to maintain current interest rates for the time being. The crucial test will arrive with the third-quarter inflation data, set for release on October 30, which will be pivotal in shaping the RBA's policy review at its November 4-5 meeting.