The Bank of Japan kept its policy rate unchanged this morning at 0.75%
Markets
Yesterday’s risk rebound lifted key US and European stock indices by 0.5% to 1.25%. Changes on US and German bond markets were minimal, but the dollar faced a tough time. EUR/USD moved from 1.1684 to 1.1755, closing in on first resistance at 1.1773/1.1808 (upside closing triangle formation/December top). A refocus on peace between Ukraine and Russia might be at play. New talks involving the US are scheduled in UAE. Today’s eco calendar contains global PMI’s, but these are unlikely to set the tone for trading. We look to overall risk sentiment and keep in mind that US President Trump in 2026 so far liked to “surprise” over the weekend. His pick of the new Fed chair is high on the agenda.
The Bank of Japan kept its policy rate unchanged this morning at 0.75% in an 8-1 majority vote. BoJ member Takata considered that the price stability target had been more or less achieved and that, with overseas economies being in a recovery phase, risks to prices in Japan were skewed to the upside. He proposed lifting the policy rate to 1%. In its quarterly outlook for economic activity and prices, the BoJ lifted its short-term growth path, mainly due to the effects of the government’s economic measures. It now expects real GDP growth of 0.9% and 1% in fiscal years 2025 & 2026 (up from 0.7% for both in October). The growth projection for FY 2027 was lowered from 1% to 0.8%. The headline inflation path was unchanged apart from a 0.1 ppt upward revision for FY 2026: 2.7%-1.9%-2%. More importantly, core-core CPI (excl. fresh food and energy) is now seen at 3%-2.2%-2.1% over the policy horizon up from 2.8%-2%-2% three months ago. The main factors that determine underlying inflation are an improving trend in the output gap towards positive territory and a greater than expected tightening of labor market conditions, partly due to a deceleration in the pace of increase in labor force participation of women and seniors. Upward pressure on wages and prices is likely to be stronger than suggested by the output gap, given that firms in many industries have started to face labor supply constraints. Risks to both economic activity and prices are generally balanced, but the BoJ mentions two specific upside inflation risks: firms’ wage- and price-setting behavior and its impact on inflation expectations and future development in FX rates and import prices. If the aforementioned outlook for economic activity and prices will be realized, the Bank of Japan will continue to raise the policy interest rate and adjust the degree of monetary accommodation. Japanese money market currently fully discount a next hike to 1% by the June meeting and see the EoY policy rate between 1.25% and 1.5%. The JGB yield curve flattens this morning with the front end creeping 3.4 bps higher while the very long end remains more in correction mode following this week’s earlier violent sell-off (-3 bps). Interestingly, BoJ governor Ueda at the press conference said that the BoJ will maintain close cooperation with government on deciding whether to conduct possible stabilizing bond (buying operations). USD/JPY holds near the recent highs (158.75) despite an overall weaker USD.
News and views
New-Zealand inflation was higher than expected in Q4 2025 at 0.6% Q/Q and 3.1% Y/Y (from 3% in Q3) and returned north of the Reserve Bank of New Zealand’s 1-3% target range. It was the fastest pace since Q2 2024. While inflation slowed considerably from its 2022 peak, Statistics New-Zealand also mentions that inflation increased each quarter since Q4 2024. The largest contributors to annual inflation are electricity, local authority rates and rent. In a quarterly perspective, an increase in air transport prices was an important diver for higher prices. Tradeable inflation increased to 0.7% Q/Q. Price for non-tradeables rose by 0.6% Q/Q. The Q4 2025 outcome was also above the November RNBZ projection (2.7% Y/Y). At that meeting, the RBNZ in a 5-1 vote still cut the policy rate by 25 bps to 2.25% as it preferred to support output, even as there were already tentative signs of an economic rebound admittedly with still ample spare capacity. Markets now see two 25 bps rate hikes by end this year. While this might be a bit premature, the 2-y government bond yield today rises by 5 bps (3.32%). The Kiwi dollar yesterday already gained sharply against an overall weaker dollar and holds north of NZD/USD 0.59 (vs 0.57 one week ago).
Indian private sector growth recovered after losing some momentum at the end of last year. The composite output PMI rose to 59.5 (from 57.8), with both services activity (59.3) and manufacturing output (59.9) improving. The improvement was supported by job creation and a rebound in business confidence. At the same time, aggregate rates of input cost and output charge inflation remained moderate despite quickening since December. On another topic related to the Indian economy Bloomberg this morning runs an article that India’s holdings of US Treasures have fallen to $174bn, a five-year low, referring to US government data published last week. The move is linked to India and other regional countries diversifying their reserves away from US assets, including raising the share of gold in their reserves. Central bank action to support the local currency might also be in play.
Author
KBC Market Research Desk
KBC Bank
