BoJ prepares markets for possible rate hike

Yen gains momentum as BoJ hints at an imminent rate hike, while UK inflation slows below expectations.

By Ahmed Azzam | @3zzamous | 15 January 2025

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  • Yen rises as BoJ fuels rate hike expectations.

  • UK inflation rate surprisingly slows.

Yen strengthens as BoJ signals potential rate hike next week

The yen gained traction in global markets as speculation over a potential rate hike by the Bank of Japan (BoJ) gathered momentum. BoJ Governor Kazuo Ueda reinforced earlier comments by Deputy Governor Ryozo Himino, signaling that a policy shift could be imminent at next week’s meeting. The coordinated messaging from the BoJ leadership is seen as a calculated effort to prepare markets for potential monetary tightening.

Overnight index swaps now indicate a 68% probability of a BoJ rate hike in January, with odds rising to 86% by March. Regional BoJ managers’ optimistic assessments of wage growth have further strengthened confidence in the central bank’s readiness to act. Governor Ueda highlighted the importance of Japan’s wage outlook, noting that improving wage trends could bolster consumer spending and support the BoJ’s inflation target.

“We are currently analyzing data thoroughly and will compile the findings in our quarterly outlook report. Based on that, we will discuss whether to raise interest rates at next week’s policy meeting and aim to reach a decision,” Ueda stated. He emphasized that domestic wage trends, coupled with the incoming U.S. administration’s economic policies, will play a pivotal role in shaping the timing of any policy adjustments.

Despite the yen’s recent strength, uncertainty lingers as markets await President-elect Donald Trump’s inauguration speech next week. Traders are looking for clearer signals on his administration’s trade and economic agenda, which could influence global sentiment and policy dynamics.

UK inflation slows below expectations

The pound faced headwinds as UK inflation data underwhelmed market expectations. Consumer price inflation (CPI) slowed to 2.5% year-on-year in December, down from 2.6% in the prior month and below forecasts of 2.7%. Core CPI, which excludes volatile food and energy prices, fell to 3.2% year-on-year from 3.5%, missing expectations of 3.4%.

Goods inflation edged up modestly, with the annual rate rising to 0.7% from 0.4%, but services inflation decelerated sharply, falling from 5.0% to 4.4%. On a monthly basis, CPI rose just 0.3%, short of the anticipated 0.4% increase.

The disappointing inflation figures add to concerns over the UK’s economic outlook as the country grapples with sluggish growth and ongoing fiscal challenges.