The US Federal Reserve (Fed), European Central Bank (ECB) and Bank of Japan (BoJ) will make monetary policy decisions this week in the shadow of inflation risks.
According to the information compiled by the AA correspondent, while the effects of high energy prices on the inflation outlook on a global scale and concerns about the sustainability of artificial intelligence investments are followed by investors, the interest rate decisions to be announced by the three major central banks have become the focus of the markets.
Concerns that ongoing tensions in the Middle East may escalate again have recently pushed energy costs up. Predictions that the increase in oil prices may accelerate inflation again and that central banks may keep interest rates higher for longer than expected are getting stronger.
The Fed’s interest rate decision will be announced on Wednesday, October 28, the ECB’s decision will be announced on Thursday, October 29, and the BoJ’s decision will be announced on Friday, October 30. While the Fed, ECB and BoJ are expected to keep policy rates constant at their meetings this week, the possibility that these banks may increase interest rates in December remains strong.
The messages that banks will give in their decision texts and the monetary policy signals for the next period are also expected to be decisive on the direction of asset prices.
FED AND ITS MESSAGES
As the most influential monetary authority at the center of the global financial system, the Fed also has the power to direct other central banks.
From this perspective, the steps the Fed will take, and especially the verbal guidance given by Fed Chairman Kevin Warsh, are expected to affect the course of financial conditions on a global scale.
The forward-looking policies to be presented at this meeting of the Fed, which increased the policy rate by 25 basis points to the range of 3.75-4 percent in September, are important in terms of inflation outlook and interest rate expectations.
Analysts stated that the high rate of inflation in the USA limits the expectations of loosening in monetary policy and strengthens the assessments that interest rates may remain high for a long time, and therefore the statements in the Fed’s decision text regarding inflation risks and the possibility of additional tightening will be carefully followed in terms of dollar and US bond yields.
CENTRAL BANK OF EUROPE
The course of inflation in the Eurozone, the economic growth outlook and the possible effects of the rise in energy prices on price stability will be highlighted at the ECB meeting.
The bank increased the three main policy rates by 25 basis points in September. In addition to the interest rate decision at the meeting to be held this week, ECB President Christine Lagarde’s statements are expected to give clues about the bank’s policy approach in the coming period.
The ECB is expected to keep the 3 main policy rates constant at the meeting in question. However, expectations that the ECB may increase interest rates in subsequent meetings remain strong due to high oil prices and inflation risks.
In addition, the selling pressure on French government bonds deepened as the intensifying street protests in France endangered public finances. While the risk of rising borrowing costs in France spreading throughout the region continues, the ECB’s decision will seek signals as to whether it will take steps against this situation.
Meanwhile, France’s 10-year bond interest rose to 5.07 percent, reaching the highest level since 2002. In addition, for the first time since 2013, France’s 10-year bond rate exceeded the US 10-year bond rate.
On the macroeconomic data side, the Producer Price Index (PPI) in Germany for September increased by 1.9 percent monthly and 6.7 percent annually, above expectations and accelerated compared to August. PPI in the country recorded its fastest increase on an annual basis since March 2023.
CENTRAL BANK OF JAPAN
While the rise in oil prices as a result of the tensions in the Middle East increases energy costs and inflation concerns, this situation continues to remain a negative factor, especially for Asian economies dependent on energy imports.
Inflation in Japan was 2.1 percent on an annual basis in September, in line with expectations. Core inflation in the country rose above 2 percent in September for the first time in 9 months. The jump in core inflation in the country above the BoJ’s core inflation target of 2 percent strengthened the “hawkish” expectations for the bank.
Markets have increased the possibility that the BoJ will leave the policy rate constant this week, but may increase the interest rate at the December meeting.
BoJ increased the policy rate to 1.25 percent in September. The outlook for inflation, wage increases and economic activity are among the determining factors in expectations regarding the BoJ’s monetary policy.
Exports in Japan increased by 16.7 percent on an annual basis in September, remaining below expectations and slowing down compared to August. The increase in Japan’s exports was driven by strong demand for semiconductors and artificial intelligence products.
Analysts pointed out that the decisions of the three major central banks, as well as the guidance regarding the future path of interest rates, are important for the course of global markets.
It is considered that if inflation risks arising from energy prices intensify, the expectation that interest rates will remain high may put upward pressure on bond yields, which may have an impact on stock valuations and global risk appetite.
