MNI INTERVIEW: Ex-BOJ's Momma Sees Strong Oct Hike Chance

A move in dollar-yen toward JPY165 or JPY170, driven by Federal Reserve policy decisions, would materially increase the likelihood of a Bank of Japan rate hike in October, former BOJ Executive Director and Chief Economist Kazuo Momma told MNI, arguing the Bank would risk falling behind the curve if it waited for underlying inflation to overshoot 2%.

“An October rate hike is my base case. If the Fed clearly shifts its policy direction, it will exert downward pressure on the yen,” which would increase pressure on the BOJ to raise rates, said Momma, now executive economist of the Research Department at Mizuho Research Institute, an internal organisation of Mizuho Bank.

Markets see little chance of a change at the July 31 meeting following this month's 25-basis-point rate hike to 1%, but have priced in a 25% probability of a September hike and a 37.4% chance of an increase in October. (See MNI BOJ WATCH: Uchida Flags More Hikes; No Timing Hint)

Momma added dollar-yen movements and developments in overseas economies and inflation "are key factors" in determining the timing of the next BOJ hike, noting the yen has largely traded in a relatively stable JPY160-JPY161 range as speculative activity has remained limited, giving Japanese authorities little reason to intervene. However, he said authorities would likely intervene if the dollar climbed toward JPY165 or JPY170 to counter excessive volatility.

The dollar traded around JPY161.60 on Tuesday in Tokyo after reaching JPY161.81 in New York, its highest level since July 2024, as expectations of higher U.S. interest rates boosted demand for the currency.

UNDERLYING INFLATION

Momma said policymakers must stand ready to raise rates, noting the BOJ would fall behind the curve if it waited for underlying inflation to overshoot 2%.

“The timing of achieving the 2% target may come earlier. But if underlying inflation remains anchored around 2%, that is not a problem. The problem is if underlying inflation rises above 2%. That is a very important policy judgement.”

Momma noted in April that the BOJ could act swiftly if risks stemming from the Iran conflict eased, citing Board concerns about upside risks to prices. (See MNI INTERVIEW: BOJ April Rate Hike Difficult - Ex-Chief Econ)

The BOJ believes underlying CPI will reach a level broadly consistent with its 2% price-stability target between the second half of fiscal 2026 and fiscal 2027, but has warned inflation could deviate upward and exceed the target.

Momma said the Board does not need to raise rates at every meeting because the economy is not overheating and inflation is not being driven by excessive demand, adding that a hike roughly every six months, or slightly more frequently, remains likely even without additional currency pressure. However, the pass-through of higher costs in business-to-business transactions has been progressing relatively quickly, he warned, noting those increases have not fully filtered through to consumer prices. 

While it remains unclear whether CPI will accelerate at a similar pace, the impact should become clearer from the summer, with price increases likely to continue this year before peaking in 2027, he argued. Momma said the BOJ should focus on assessing the degree of underlying inflationary pressure in the economy, arguing that whether wage growth accelerates in 2027 will be central to future policy decisions.

WAGE GROWTH

While wages are rising by 5.02% in the current fiscal year, marking a third consecutive year of gains above 5%, the BOJ believes the current relationship between wages and inflation is consistent with achieving its 2% target, Momma said.

Policymakers are closely monitoring the risk that inflation and wages could become entrenched above 2%, which would push underlying inflation beyond target, he noted. “It is too early to worry about wage growth accelerating toward 6%. If the economy weakens, there is a risk that wage increases will fall below the levels seen over the past three years. The BOJ therefore does not need to rush to raise rates.”

With upside risks to inflation increasing, attention should focus on whether corporate inflation expectations for three and five years ahead rise in the June Tankan survey due July 1, Momma said. Even a 0.1 percentage-point increase from previous projections — for example, to 2.5% for both three-year and five-year expectations — would heighten the BOJ's concern about upside inflation risks, he warned.

MNI INTERVIEW: Hormuz Traffic To Take Months To Normalise

Disruption to the Strait of Hormuz will take months to renormalise, with the number of ships crossing the waterway below usual capacity and shipping rates to and from the Middle East elevated, the co-founder of a programme providing port data to governments told MNI.

"Shipping rates from and to the Middle East, will probably stay high … So that's partly because of this still reduced capacity ... and on top of that, these war premiums will probably be fed into prices as well indirectly," Jasper Verschuur, an assistant professor at TU Delft and co-founder of the PortWatch initiative, said in an interview.

Disruption should continue for "weeks and potentially months rather than days" after the strait is reopened.

The risk of mines could reduce transit through the strait, whose daily capacity is probably around 120-140 ships, below Portwatch’s estimated long-run average of 100, according to the programme created by economists at the IMF, Oxford Economics and TU Delft to aggregate UN Automatic Information Systems data on maritime routes.

Once past the Strait, more ships may be tempted to take the shorter route to Europe via the Red Sea and the Suez Canal, rather than the longer trip around the Cape of Good Hope, Verschuur said. Passage through the Red Sea and Suez is about half of what it was before Houthi rebels began attacking ships in late 2023.

VALUE LEVEL, VOLUME DOWN

Global shipping volumes have also fallen slightly since the start of the crisis in the Persian Gulf, though their value has remained steady due to higher energy prices, according to Verschuur.

"We saw this little dip in the last two months or so, in terms of the global volume that's being shipped, that was compensated in value terms by the increase in prices." (See MNI INTERVIEW: Iran War Risks Broadly Higher Shipping Costs)

LITTLE USEFUL PRECEDENT

Although the PortWatch dashboard provides data on several recent disruptions to maritime shipping, Verschuur said these experiences do not provide a good model for how the current situation might renormalise.

"The situation now with this reopening is in no way comparable to anything we have experience [of]," such as the six-day closure of the Suez Canal in 2021 or the drought in the Panama Canal in the past year, he said.

The war between Russia and Ukraine has only minimally impacted trade volumes, so it is also a poor guide for how the resumption of crossings could play out, he added.

"Despite the fact that the war [in Ukraine] is horrible, the Black Sea shipments ... to a large extent, kept going."

MNI INTERVIEW: Hawkish Fed Tilted Toward Hikes, Says Groen

Federal Reserve officials are increasingly likely to push interest rates higher as inflation proves more stubborn than they thought earlier in the year, though a tightening cycle is not yet a foregone conclusion and depends on the extent of second-round effects from the Iran shock, former New York Fed economist Jan Groen told MNI. 

“It’ll be hard for Warsh to stem the hawkish tide within the FOMC,” said Groen in an email exchange. “The Committee has shifted towards a more of hawkish outlook centered on inflation worries, especially now that the jobs reports since the start of the year have come in meaningfully strong.”

Groen said he has not changed his official call for the Fed to stay on hold through the end of 2027 just yet. But he added: “The risks of the start of a hiking cycle have gone up meaningfully and the direction of travel will be up."

"The biggest uncertainty in this regard for me is the timing and duration. Unless we have an unpleasant core inflation print soon, I’m not so sure we’ll have a hike in the immediate future.” (See MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn)

Groen noted that even more hawkish FOMC members indicated in public comments ahead of the June meeting that hikes might be needed later in the year, which he interprets as coming somewhere close to year end. 

“When you look at the dots to show hikes for 2026 you could roughly see a potential start date for hikes at the October meeting, but I’m not so sure that Warsh would go along with that as it is right at the doorstep of the midterms,” he said.  

INFLATION MOMENTUM

The inflation picture has deteriorated significantly in the past couple of months, with PCE inflation hitting 3.8% in April while core prices rose 3.3%. Warsh’s first meeting saw a notable hawkish shift in rate forecasts, with nine officials penciling in a hike this year. 

“I have argued for a while that the inflation momentum was heading in the wrong direction well before the Iran war, especially core services inflation has been stuck at an average well above target-consistent levels,” wrote Groen, now chief U.S. economist at Societe Generale. “The impact of structurally higher tariffs and the Iran war have only amplified these trends."

He said the conflict in the Persian Gulf has heightened worries among FOMC members that supply shocks might be a more recurring feature of the global economic landscape.

“For many Fed officials the Iran war-induced oil price shock served as a wake-up call to the dangers of tolerating a persistent overshoot of the Fed’s nominal anchor: in an environment where inflation shocks happen more frequently, at some point a sequence of those shocks could dislodge inflation expectations with all the unpleasant consequences that come with it.”

If the Fed does hike rates, it will probably deliver about three quarter-point hikes that more or less take back the three “insurance cuts” of late 2025, said Groen. 

LESS TALK, MORE VOL

Groen said Warsh will bring considerable changes to the Fed’s communications approach, including likely doing away with the Summary of Economic Projections. 

“Warsh clearly doesn’t like the SEP as well as too-detailed speeches spelling out a Fed official’s outlook,” said Groen. 

“If, instead, we are doing away with more explicit guidance and scenario discussions and have public Fed remarks that are mostly ‘light’ on content, markets will face a lot of uncertainty, not only about the medium-term path of the policy rate but also the immediate policy rate decision. Nonetheless, I believe this communications task force will push in this direction – and likely do away with the SEP,” he added. 

“So, as was the case in the Greenspan era, the likelihood of surprise rate decision will go up and consequently structurally higher bond market volatility will become a feature of the Warsh Fed.”

MNI INTERVIEW: Italy Banks Want Stablecoins Held To EU Rules

The spread of dollar stablecoins poses a security threat to Europe, Italian Banking Association (ABI) Head of Strategy and Innovation Gianluca Tiani told MNI, calling for a ban on U.S. tokens which fail to meet European standards and for the rapid development of euro-based alternatives.

Tiani said the review of Europe’s MiCAR crypto-assets regulation in coming weeks should introduce a bar for foreign stablecoin issuers unless they match EU prudential standards on reserves, capital and liquidity.

"The differences --particularly the ability to pay interest to users and the absence of MiCAR-equivalent protections -- are already capable of producing distortive effects on our regulatory framework," Tiani said in an interview.

Reverse solicitation provisions, which allow cryptos to serve clients without a local license if the client requests the service, also need tightening, he said. Existing capital requirements on crypto assets place European banks at a competitive disadvantage relative to non-banks, he added.

KILL SWITCH

Italy and Germany want the European Banking Authority to have a “kill switch” for stablecoins if they act against the interests of EU token holders, Tiani said. (See MNI INTERVIEW: Euro Stablecoins Or Dollar Colony - Bini Smaghi)

"The risk of dollarisation of our economic system is real, and if we don't have this button we risk losing monetary sovereignty in Europe and becoming excessively dependent on the American economy," Tiani said. "The more you put dollars or near-dollars as stablecoins into someone's hands, you have an instrument of currency weaponisation in their country."

Stablecoins are going mainstream more quickly than other cryptocurrencies and are becoming the default instrument for cross-border corporate treasury management, Tiani said, adding that without a euro-based alternative, European multinationals will use the dollar option by default. 

"If we ostracise or are too negative toward euro stablecoins, we will clearly create demand for dollar stablecoins," he said, describing this instrument use for cross-border payments as "extremely easy, fast, potentially cheap and super efficient.”

U.S. regulation which requires stablecoins to be backed by low-risk assets such as short-term Treasury bills means that purchasing the tokens can contribute to financing the U.S. government. U.S. technology and e-commerce platforms are seen as likely to embed stablecoin functionality into everyday transactions, potentially drawing in some consumers who may not realise they are converting their euros, while some retail customers could also be attracted to them as an alternative to money market funds. (See MNI INTERVIEW: Stablecoin Boom Adds Uncertainty To Fed Policy)

The European Central Bank’s approach to stablecoins has been cautious, acknowledging the threat from allowing too great a penetration of dollar tokens, but insisting that central bank money must remain at the centre of the eurozone financial framework. Tiani said that Europe does not have time to develop a digital euro first and that the two initiatives must advance in parallel. (See MNI INTERVIEW: Digital Euro Risks Failure-Ex Bank Of Spain Gov)

EURO COINS

The Italian banking sector's own projected stablecoin, EUR.Bank, will be backed by reserves which remain on the balance sheets of participating commercial banks, addressing ECB concerns about disintermediation, Tiani said.

Italian banks are also among a consortium of European lenders aiming to launch pan-European level stablecoin Qivalis in the second half of 2026 in the Netherlands, Tiani noted.

"The simultaneous participation of some Italian banks in Qivalis at European level and in EUR.Bank at national level is a signal of parallel learning on different use cases and architectures, which will in time converge towards more mature forms of interoperability," he said.

 While Qivalis offers pan-European scale and liquidity, EUR.Bank benefits from proximity to a national banking system and economy, Tiani said, though he added that interoperability will be a critical requirement as the market matures.

“We are now starting to think about interoperability. If they run on the same rails, we avoid a problem we would otherwise have to solve later," he added.

Both private initiatives are complementary to the ECB's digital euro rather than competitive with it because they are two fundamentally different forms of money, Tiani said, describing the digital euro as "public infrastructure of reference.”

MNI PBOC WATCH: New Overnight OMO Tool To Reduce Funding Costs

Although China's Loan Prime Rate remained unchanged this month, the People's Bank of China's planned overnight-rate reforms could effectively deliver a modest monetary easing by lowering funding costs across the financial system.

China's Loan Prime Rate remained unchanged on Monday at 3.0% for the one-year maturity and 3.5% for the five-year tenor and over, marking a 13th consecutive month without change. Both rates were last reduced by 10 basis points in May 2025 after the PBOC lowered its benchmark seven-day reverse repo rate by 10bp to 1.4% on May 8, followed by a 50bp cut to the reserve requirement ratio on May 15. (See MNI PBOC WATCH: June LPR To Hold Despite Economic Slowdown)

INTEREST-RATE REFORM

Governor Pan Gongsheng announced last Wednesday that the central bank would introduce an overnight reverse repo facility while narrowing the interest-rate corridor by 20bp. The Bank will set the upper and lower bounds of the temporary overnight repo and reverse repo facilities at 25bp above and below the seven-day reverse repo rate to promote the transition of the monetary policy framework toward a price-based regime, improving the precision and effectiveness of short-end interest-rate management.

Dong Ximiao, chief economist at Merchants Union Consumer Finance, told MNI the changes would limit fluctuations in overnight rates, reduce funding-rate volatility and stabilise liquidity expectations among financial institutions, helping lower financing costs for businesses and households. (See MNI: PBOC Targets Monetary Policy Reform Via Overnight Rate)

The current short-term interest-rate corridor is centred on the 1.4% seven-day reverse repo rate, with temporary overnight repo and reverse repo rates serving as the lower and upper bounds. The corridor now ranges from 1.15% to 1.65%, compared with the previous 1.20% to 1.90%, following Pan's announcement.

Analysts interpreted the announcement as a signal that the PBOC intends to keep DR001 fluctuating closely around the seven-day reverse repo rate, while also highlighting the possibility that the overnight rate could eventually become the benchmark for loan pricing.

While the rate on the planned overnight reverse repo facility has yet to be announced, Wang Qing, chief macro analyst at Orient Golden Credit Rating International, estimated authorities could set it at 1.3%, 10bp below the current seven-day reverse repo rate. If the overnight rate is eventually designated as the benchmark policy rate, it could replace the seven-day reverse repo rate as the LPR’s benchmark, he added.

LOWER FUNDING COSTS

Analysts noted that if the overnight reverse repo rate is set at 1.3%, policy rates from the seven-day reverse repo to the one-year Medium-Term Lending Facility could gradually converge toward the new benchmark. That would lower banks' funding costs by between 5-10bp, generating an easing effect similar to a policy-rate cut even if the benchmark rate itself remains unchanged.

According to Lu Ting, chief China economist at Nomura, the direction of the PBOC's interest-rate framework reform is clear, with China gradually moving toward the simplified structures used by other major central banks. He agreed that the benchmark policy rate is likely to shift from the seven-day reverse repo rate toward an overnight rate. 

MNI INTERVIEW: ECB Ready To Hike Or Change Course - Kocher

The European Central Bank is close to its baseline inflation scenario following the end of hostilities in the Gulf but remains prepared to hike rates or to change its monetary policy stance if necessary, Austrian National Bank governor Martin Kocher told MNI.

"Clearly we want to avoid unnecessary hikes given the economic situation, but if the data indicate that additional action is needed to ensure inflation returns sustainably to target, we are fully prepared to take it," Kocher said in an interview.

“As for where we stand now, it is still too early to say. We have had a week with lower energy prices and there is some optimism, which I hope will continue. At this stage, we are still very close to our baseline. Whether that remains the case will depend on how events unfold over the coming weeks. We still have around five weeks until the next meeting, which is a long time in the current environment.”

Kocher said last week’s 25-basis-point rate hike was necessary “in all the scenarios, even in the mild scenario,” and that there was “clearly a signal that it's not an insurance hike given the projections for the inflation outlook.”

Asked whether September’s meeting, which will be accompanied by fresh ECB staff macroeconomic projections, would be the next live decision, Kocher said that while policymakers would hike if necessary, it cannot be assumed that every meeting will mean a rise in interest rates. (See MNI ECB WATCH: ECB Hikes, Sticks With Meeting-By-Meeting)

“If it turns out to be the case that everything unfolds much more positively and much more quickly than expected, then given our general approach there is no reason not to change the monetary policy stance," he said. “But it is far too early to draw conclusions about future policy decisions.”

A potential increase in the neutral rate of interest to 2.5%, cited again by ECB chief economist Philip Lane this week, has been circulating for some time in academic circles, and discussed by the Governing Council, according to Kocher. Though the precise figure is hard to calculate, it “does not seem implausible, which would mean our current policy stance would be around neutral or perhaps is still slightly expansionary,” he said.

NO SECOND-ROUND SIGNS

So far there is no widespread evidence of second-round effects, Kocher said, though indirect effects of the price shock following the closure of the Strait of Hormuz are visible, and there are "clearly" some indications of inflation propagation.

“Although widespread evidence of second round effects is not present, it's not surprising. Usually, second round effects in supply shocks are associated with wage negotiations, and while some have taken place since the beginning of the war, it’s not that many in Europe. So we have to remain cautious here,” he said.

The euro area economy started 2026 “quite strongly,” with some underlying momentum carried forward despite the war, raising hopes of further improvements over the medium term, he said.

“That makes it unlikely that our growth outlook for 2026 is overly optimistic. It could even turn out somewhat better if the situation continues to improve in the Middle East.

“As for 2027 and 2028, uncertainty is still high. That said, I remain cautiously optimistic. A lot of investment has been postponed and savings rates are high, so there is considerable potential for higher growth rates once uncertainty begins to recede.”

TRADE RISKS

Trade has been a frequent topic of discussion within the Governing Council, Kocher said, including the impact of Chinese overcapacity, and potential European responses such as the Industrial Accelerator Act, on price pressures. 

“Permanently rerouting trade is likely to have price effects over the longer-term. At the same time the EU is seeking greater strategic sovereignty in some areas - which is perfectly legitimate. However, whenever that happens, we will have to discuss the impact on prices, since there are clearly capacity constraints,” he said.

“It remains to be seen to what extent the European Union will implement these kinds of proposals. But it should also be remembered that trade agreements, such as those with Australia and India, can lead to lower prices for certain products and services, at the same time.”

MNI INTERVIEW: Fed Warsh 'Strategically Hawkish' - Lockhart

Kevin Warsh navigated a delicate balancing act between reformer and institutionalist in his first FOMC meeting, heralding a rethink of key policy tools while carrying forward a hawkish shift that had already begun under his predecessor, former Atlanta Fed President Dennis Lockhart told MNI. 

A hike is firmly on the table this year, Lockhart added, citing the committee's updated policy statement and rate projections, which signaled the Fed's first serious consideration of rate increases since the current inflationary cycle began. 

"There's a better-than-even chance of a hike this year, but that presumes that the inflation picture continues to be troubling and that the committee feels it has to act," he said. (See MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn)

STRATEGICALLY HAWKISH

The FOMC's updated Summary of Economic Projections revealed a committee shifting decisively toward tightening, upgrading inflation projections while downgrading its growth forecasts. Nine out of 18 rate projections showed one or more increases in the second half of the year, compared with nine for maintaining or lowering rates.

Even as Warsh tried to say as little as possible on the future path of interest rates, his tone was "strategically hawkish" -- careful but pointed, driven not so much by what he said as what he left unsaid, Lockhart said.  

"The current conditions call for hawkishness. He never stated that explicitly, but you can infer that," he said. 

"He made the statement that the committee is committed to restoring price stability. The committee has missed its target for over five years. It would be inconsistent with that longer-term statement to say we prioritize employment under the current situation."

LESS IS MORE

The revised policy statement, stripped of what Lockhart called "a lot of boilerplate," was a signal of how Warsh intends to run the institution, Lockhart said. 

"This was a simplification and a very direct statement without the forward guidance in it. Clearly one of Kevin Warsh's views is less is more when it comes to Fed communications."

The committee's reaffirmation that it would maintain ample reserves in the banking system signaled no aggressive effort to unwind the balance sheet in the near term, while the closing declaration -- "The Committee will deliver price stability." -- makes clear that the inflation objective takes priority, Lockhart said. 

"I don't think it somehow dismisses the other side of the mandate, the employment side." 

VOLUNTARY DOTS

That Warsh declined to submit his own dot was a break with convention that raises questions about whether participation in the projection process is becoming voluntary. Warsh has set up a communications task force, and changes to the SEP could follow by year-end, Lockhart said. (See MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis)

"If people opted out and this gets to be a little bit more of a ragged process -- note that one person chose not to put in a forecast for 2028 -- then it will tell you less about the thinking of the committee overall," he said. "The dots give you a sense of the mind of the collective participants of the committee at that particular time. That's not exactly what the market wants -- the market wants certainty and definitive statements -- but it's something." 

Replacements for the dot plot have been debated in the past, including a single committee forecast, but never implemented due to the difficulty of reaching consensus.

"It would be far too hard. We would be cloistered for a week or more trying to get to a consensus forecast. Because of the degree of difficulty of that perhaps more useful communications device, the committee always fell back on: let's stick with the dots, they're as good as we can deliver."