Archive

Japan: 25bp Rate Hike To 0.5% (Consensus 0.5%) in Jan-25

• The BoJ raised its policy rate by 25 basis points to 0.5%, consistent with market expectations and reflecting a gradual recalibration of monetary policy as inflationary pressures stabilise near 2.5–3.0% in the medium term.
• Persistent wage growth, yen depreciation, and improving labour market conditions underpin inflation forecasts. However, due to commodity price volatility and exchange rate sensitivity, inflation risks are tilted to the upside.
• While financial conditions remain accommodative, future rate hikes are likely if inflation expectations and wage-price dynamics sustain alignment with the BoJ’s medium-term stability target of 2%.

HEW: Realising Policy Divergence

• The chasm between the US and European PMIs compressed, removing this justification for the massive Fed-ECB policy divergence in the price. Ironically, their policies are set to start diverging next week with the ECB cutting while the Fed holds rates.
• The BOJ hiked while the Norges Bank approached its first cut in March. Meanwhile, UK pay awkwardly surged, but rising unemployment will help justify a cut on 6 February. Sweden, Canada, Chile, Brazil, and Colombia will also announce policy before then.
• Note: Smartkarma will become the sole distributor of our research in February, so clients should prepare their access now (send queries to transition@smartkarma.com).

By Philip Rush

GBP Depressed By Fiscal Risk Premium

• UK government spending and deficits have attracted unwelcome attention amid falling sterling and bond prices. Yet long-term rate moves match US and short-rate shifts.
• Sterling weakness defies relative rate moves, suggesting a risk premium worth about 4%. About 1.5pp of that premium is probably US trade policy, with the rest UK-specific.
• Donald Trump should sustain his threats against the EU but could be softer with the UK. Fiscal risk will likely extend beyond the 26 March Budget amid tough talk, not action.

By Philip Rush

Norway: Rates Held At 4.5% (Consensus 4.5%) in Jan-25

• The Norges Bank kept the policy rate unchanged at 4.5%, in line with expectations, and reiterated its guidance for a potential reduction in March as inflation moderates further.
• Inflation has decelerated faster than anticipated, with headline CPI at 2.2% in December, though core inflation remains above target due to persistent wage growth and high business costs.
• External factors, including rising policy rate expectations among trading partners and potential trade barriers, alongside domestic economic resilience, will influence the timing and magnitude of future rate adjustments.