MNI BOJ WATCH: Ueda Leaves Door Open For December Hike

Bank of Japan Governor Kazuo Ueda on Friday left the door open to a rate increase as early as December, saying the Bank would assess upside inflation risks and discuss monetary policy at every meeting as it seeks to anchor underlying CPI inflation around its 2% target, following the Board's decision to leave the policy rate at 1.25% on Friday.

Ueda told reporters that the BOJ would not adopt a "wait-and-see approach" to achieving price stability target and it would continue to adjust monetary policy to secure stable inflation. However, he cautioned against anticipating a predetermined pace of tightening. “We cannot say the timing of rate hike and its pace in advance, such as once every several months, as it depends on the upside risk to prices and the degree of accommodative financial conditions,” Ueda said, following the largely expected decision that resulted after an 8-1 vote. (See MNI BOJ WATCH: Board Likely To Hold, Examine Rate Hike Impact)

Although underlying CPI inflation has reached a level broadly consistent with the 2% target, the BOJ cannot declare victory until inflation is sustainably anchored around that level, Ueda said, adding the Bank was assessing whether underlying inflation would remain stable following economic or price shocks. (See MNI POLICY: BOJ Nearing Target To Forgo Victory Declaration)

While upside risks to prices had not strengthened from a month ago, the Bank could not ignore them, Ueda noted. He said the Bank needed to deal with upside price risks "in an appropriate manner as underlying CPI inflation has reached the 2% target,” when pushed on whether the BOJ needed to raise the policy rate towards the neutral level as soon as possible. 

“Underlying CPI inflation is at a level that is generally consistent with the price stability target of 2%, and is expected to remain at around that level,” the Bank said in its post-meeting statement. It added that examining the extent to which underlying inflation was anchored around 2% would be important to achieving the target sustainably and stably.

Markets have priced in an 80% of a December hike to 1.5%, with a 1.8% policy rate expected by June. 

FINANICAL CONDITIONS

Ueda also acknowledged that the adverse effects of previous rate increases were emerging, particularly in funding conditions for smaller firms. “We need to carefully and strictly examine whether fund-raising problems are expanding through various data including hearings by branches,” Ueda said, warning some accumulated effects of monetary tightening were visible, while others remained difficult to assess.

The BOJ would consider the appropriate conduct of monetary policy in relation to price developments if further adverse effects from previous rate increases emerged, he explained, without elaborating.

OUTLOOK REPORT

The BOJ maintained its median forecast for core CPI inflation in the current fiscal year at 2.5%, but raised its FY2027 projection to 2.6% from 2.5% in July, citing higher crude oil prices. The Bank lowered its FY2027 GDP growth forecast to 0.7% from 0.8%, reflecting the delayed economic effects of higher crude oil prices since August.

However, the Bank maintained its assessment that risks to economic activity were generally balanced, while the CPI outlook remained skewed to the upside.

MNI RBA WATCH: Board Likely To Hike Following Hawkish Signals

The Reserve Bank of Australia is likely to raise its cash rate by a further 25 basis points to 4.85% next week, following elevated underlying inflation in Q3 and a series of hawkish comments from senior officials.

Governor Michele Bullock left the door open to further increases following September's meeting, which delivered the fourth 25bp hike of 2026, saying the Board would do what was necessary to bring inflation back to target. (See MNI RBA WATCH: Bullock Says Will Hike More If Needed)

Since then, inflation has remained stubborn, while Bank officials have signalled that the outlook is set to worsen. The RBA will also update its economic forecasts next week, with senior leadership warning of mounting inflationary pressures that will see the Bank revise its inflation outllook. 

Markets price an 80% probability of a hike next week, with the cash rate expected to peak at 4.9% by March.

ECONOMIC DATA

Trimmed mean inflation was 1% q/q in Q3, in line with expectations, while headline CPI was 1.3%, 10bp above forecasts and up from 0.6% in Q2, Australian Bureau of Statistics data showed Wednesday. Trimmed mean inflation was 3.7% y/y in Q3, 10bp above expectations, while monthly trimmed mean printed at  0.3% in September, up 10bp from August. Headline CPI rose 4.3% y/y in September, accelerating from 4.0% in August.

Market services inflaton, which is strongly linked to domestic supply constraints and a key RBA focus, recorded its strongest annual growth since 2024 and was among the largest contributors to Q3 inflation. September's figures also showed automotive fuel prices rose 9.4% m/m following a 14.8% increase in August, reflecting higher oil prices.

While the labour market continued to loosen in September, with unemployment rising to 4.7%, risks of a further rate increase remained skewed to the upside, former bank economists told MNI. (See MNI INTERVIEW: RBA Hike Risk Remains, Despite Jobs Data) 

“We always talk about looking through seasonality around the end of the calendar year, and I think this could be a case of looking at the trend numbers now, or even the [non-seasonally-adjusted] numbers,” said Blair Chapman, senior economist at SEEK and a former RBA research economist, noting the ABS's changes to its data collection methodology made its seasonal number less reliable. “When you take a step back and look at it, movements over the last couple of months, it's a bit softer, but it's not as obvious that there's a massive deterioration."

LEADERSHIP SIGNALS

Appearing before the Senate Economics Legislation Committee following the release of Q3 inflation data, Deputy Governor Andrew Hauser said this week inflation remained “too high”. This followed comments last week that the RBA expected quarterly inflation to exceed its August forecasts.

Assistant Governor Sarah Hunter also said on Sunday night's 60 Minutes programme that inflation remained too high. Domestic demand continued to exceed sustainable levels, while inflationary pressures were broadening, she warned.

PAUSE CASE

One former RBA staffer said the Board could nevertheless opt to leave the cash rate unchanged, given Q3 trimmed mean inflation did not exceed 1% q/q.

“If we had a 1.1% [m/m Q3] trimmed mean, that would be above anyone's nowcast that I've seen and it would be above [the RBA]’s statement forecast,” said Justin Fabo, founder of Antipodean Macro and the RBA’s former head of international financial markets. A Q3 trimmed mean result of 1.0% q/q, while still elevated, would give the Board scope to justify a pause by arguing September's 25bp increase to 4.6% had been pre-emptive, he added.

MNI INTERVIEW: Oil Not Primary CPI Driver - Ex-RBA's Harper

Persistently weak productivity growth rather than higher energy costs remains the primary source of inflationary pressure in Australia, former Reserve Bank of Australia Board member Ian Harper told MNI, adding that the key question facing the RBA Board was how far rates would need to rise to close the positive output gap.

“We've got growth in aggregate demand that is still ahead of aggregate supply, hence the tightening of policy,” said Harper, professor emeritus at the University of Melbourne and an RBA Board member from 2016 to August 2026. “The reason the Bank had to reverse course earlier this year was exactly that – we underestimated the rate of growth of demand and overestimated the rate of growth of supply.” 

The RBA started a hiking cycle in February, increasing its cash rate by 25 basis points then making further moves in March, May and September. With the cash rate now at 4.6%, the Bank still has scope to raise rates further this year, though policy is already restrictive in real terms, Harper noted, with the real rate, calculated by subtracting long-term expected inflation from the nominal rate, remaining at about 2.1%.

“Who wants to say that's not restrictive when the economy is growing at less than that?” he said in an interview.

The RBA assumes productivity growth of 0.7%, which Harper described as already a low estimate, though actual growth has recently been close to zero. Boosting productivity is "out of the Bank's hands," he said.

While any further sharp rise in oil prices would add a further cost-push element to inflation and add to inflation expectations, it would still be a supply-side cost phenomenon, with excess demand and a positive output gap remaining the main force pushing prices higher, he said. Any resulting reduction in real and disposable incomes from dearer fuel could also help moderate demand, potentially allowing central banks to look through the shock.

FORWARD GUIDANCE

Harper backed the RBA's decision to avoid forward guidance tied to a specific time horizon, saying its approach should instead be to explain how policy would respond to changing economic conditions.

Recent speeches by Deputy Governor Andrew Hauser and Chief Economist Sarah Hunter indicated that the Bank was communicating its assessment of the economy and the further policy action which might be needed, without specifying when it would occur, he said.

The approach reflected lessons from the RBA's earlier experience with forward guidance, when statements made with qualifications were interpreted by markets and the public as stronger commitments than intended. “The Bank can give some forward indication of how it's likely to respond as it reads the state of the economy, and that's appropriate,” Harper added.

Understanding the central bank's reaction function could help the public anticipate policy decisions and support the transmission of monetary policy, he continued. But even qualified guidance tied to a particular time horizon risks being interpreted as a commitment. “I don't think it's time to move on from that lesson, because I doubt that people would respond any differently today if you reverted to time-based guidance.”

BOARD VISIBILITY

Harper also questioned expectations that external RBA Board members would frequently make independent public statements on the economic outlook, despite recommendations for improving transparency under the Bank's reforms.

The main purpose of the initiative was to make Board members more publicly visible, rather than encourage them to offer independent assessments of the economy or the likely direction of policy, he said. 

The current arrangement was for each Board member to deliver one public presentation a year, he explained, noting the new regime had only recently begun. However, expectations of more detailed public insight into individual members' views or Board dynamics were unrealistic.

MNI INTERVIEW: Fed Set For Quarterly Hikes Through March-Groen

The Federal Reserve looks set to raise rates twice more, probably in December and March, before deciding whether the inflation picture looks sufficiently benign to allow them to hold rates steady there, former New York Fed economist Jan Groen told MNI. 

Groen thinks the Fed’s decision to leave rates on hold at 3.75%-4% this week reflects a committee that is deeply divided between officials who feel an immediate need to tighten policy after five and half years of above target inflation and those who believe the central bank can be more gradual. 

“The end result is more like a quarterly pace of tightening. They try to take out the the insurance cuts from last year. That's probably the end point. With that dynamic in mind, you're looking at probably a December and March hike, and that's about it.” 

Still, uncertainty is high with persistently elevated energy prices and a worrisome broadening out of inflation in the latest readings, he added. 

“There’s going to be a slew of inflation data between the December and January meeting. If that data comes in worse than expected, then we might have to start to think about whether three hikes is enough in this cycle," said Groen, now chief U.S. economist at Societe Generale. 

Hot inflation figures and strong growth backdrop could have definitely supported an October rate increase, he said. “The inflation data is pretty abysmal, especially if you look under the hood, things like super core and all these kinds of trimmed measures.”

MORE HIKES COMING

Warsh’s recognition that financial conditions can still not be described as tight indicates that he sees the need for additional hikes, said Groen. He suspects Warsh might have preferred to hike rates at the October meeting but lacked support from enough FOMC members. 

“I think if it would have been up to him, he would have probably voted for a hike. But I think the likes of (New York Fed President John) Williams and others, they don't want to move at a very fast pace in terms of tightening policy. The data really needs to drag them to the next hike,” he said. (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)

“It’s pretty clear he knows that they're kind of behind the curve. But there's a committee, and there's just a big chunk of the committee that just doesn't want to move quickly.” 

PRODUCTIVITY MIRAGE

Warsh’s optimism that robust economic activity can co-exist with low inflation is based on hopes for rapid productivity growth that Groen fears might not materialize.

“The data is not that convincing, to be honest. He is talking a lot about productivity over the last couple of years having moved up. I'm not so sure about that. It's been very volatile, but if you kind of dig underneath the data and kind of smooth things out, I think trend productivity recovered from the trough from COVID, but it's more or less the same as it was around 2019 or something like that,” he said. 

“So I don't see evidence yet of structurally higher productivity growth going forward. I'm sure it's going to happen a few years down the line, but I think implementing the advantages of AI into how companies operate takes quite a long time.”

In the meantime, AI has become an inflationary force for now. “Demand for AI-related things is a lot of faster than the supply. That’s something to keep an eye on because it has a bit of a bubble flavor to it.” (See: MNI INTERVIEW: Fed Will Hike Later To Keep Up With AI- English)

MNI INTERVIEW: Ex-Fed’s Mester Sees Little Need For Hike Pause

The Federal Reserve should raise interest rates steadily until it decides policy is restrictive enough to start reining in an inflation rate that has been moving in the wrong direction, former Cleveland Fed President Loretta Mester told MNI. 

“I would have preferred that they go ahead and move the rate up,” she said in an interview regarding this week’s FOMC decision to hold rates steady. 

“There were certainly enough people in their SEP from September who don't feel that they're finished raising rates in the cycle, and the data and the economic arguments seem to be pretty strong that they're going to need to bring rates up from the current level.” (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)

Mester was disappointed by what she viewed as an insufficient explanation during Chairman Kevin Warsh’s press conference for the absence of a tightening move in the face of data that appeared to call for one. 

“I would have hoped, given how the data played out in the intermeeting period really supporting further rate increases I believe, and the fact that they decided not to do it, I would have liked him to put out – here’s what we talked about as the factors that influenced that decision. And we got none of that really,” Mester said. 

“I thought Jackson Hole was the start of him explaining more about the economy and sort of their reaction function. He might not call it a reaction function, but that was kind of where he was going, and I didn't feel we got a lot of that, if any of that really, in the October press conference.”

SLOWER IS BETTER

Mester worries that if the Fed moves too slowly to contain the recent bout of inflation, it might need to act more aggressively later, seeing echoes of the complacency she experienced as an FOMC member around 2021. 

“If you remember during the 2021 run up in inflation, it was always like, well, we need more information,” said Mester. “When you delay, and if the risks are tilted to the upside on the inflation data, then I think there is a higher chance that you could have to go faster, and it's probably better to go slower.” 

She also believes the central bank should seize the moment – against a backdrop of robust economic activity and stable employment – to move rates higher in order to battle a persistently high inflation rate that’s still hovering near 3%, well above the 2% goal. 

“There is an opportunity here, because the labor market has been very stable and steady, and the inflation data had been moving up, not down. So it seemed to me the combination of looking at the dual mandate goals would say take advantage of this time, where basically everything was moving in the in the direction that suggests you need to raise rates, to go ahead and take advantage of that,” said Mester.

AI INFLATION

Mester said Warsh is right to point out that not all growth is inflationary, and that productivity gains should help relieve price pressures over the long run. But, in the near-term, AI and the demand boom that comes with it is actually proving an inflationary force, said Mester. 

“In the near term in my view it is inflationary. What we’re seeing in the AI buildout is creating more imbalance between supply and demand because a lot of those components are in short supply." (See MNI POLICY: AI Buildout Emerges As Top Inflation Risk For Fed)

Mester pointed to a dissonance within a committee in which the chair is no longer offering forward guidance but many of colleagues continue to very much do so.  

“It's hard to argue the Fed’s not doing forward guidance. Yes, it is true, the chair isn't doing forward guidance, but I mean, there's still forward guidance being given by members of the committee. I think that they're going to have to resolve something there,” she said.

MNI ECB WATCH: ECB Holds, Waiting For December Confirmation

The European Central Bank held its key interest rates unchanged on Thursday as expected, with President Christine Lagarde noting that while current data could have warranted a hike, the decision was unanimous and that the ECB will wait for incoming data and new set of projections before its next policy decision in December.

A hike was debated at this month’s meeting, Lagarde confirmed, agreeing with a reporter’s characterisation of the outcome as a “non-hiking decision.”

While the ECB retained its meeting-by-meeting approach, the president said that its direction of travel is clear, though it is awaiting more data to confirm its next move.

So far no second-round inflation effects from higher energy prices above those already incorporated into the latest projection rounds have been detected, Lagarde noted.

"We have paid lots of attention to second-round effects. We are very attentive and at this point we are not seeing risk of second-round effects in addition on top of what is projected," Lagarde said.

TIGHTENING FINANCIAL CONDITIONS

In its policy statement the ECB said that inflation risks were tilted to the upside from higher energy prices but that both dearer fuel and the tightening of financial conditions could also weigh on growth and inflation in the opposite direction. (See MNI SOURCES: Bond Selloff, France, Clouds ECB Dec Rate Call)

Asked about the rise in long-term bond yields, which has notably affected France, Lagarde replied that countries with high debts would have to take into consideration in their fiscal policy plans "the fact that interest rates are higher and will probably remain higher for a period of time.”

Governments should comply with the European fiscal framework, she noted, though she added that that should disorderly markets threaten the smooth transmission of monetary policy, the ECB has the tools to respond.

“The criteria and conditions under which this applies are well known,” she said.

Earlier on Thursday, the ECB announced that Lagarde would leave her position early, with her last Governing Council meeting to come in February. The ECB president said that her move was motivated by a desire to no longer remain neutral on French politics, and observed that the search for her successor was already well underway. 

MNI ECB WATCH: ECB Holds, Waiting For December Confirmation

The European Central Bank held its key interest rates unchanged on Thursday as expected, with President Christine Lagarde noting that while current data could have warranted a hike, the decision was unanimous and that the ECB will wait for incoming data and new set of projections before its next policy decision in December.

A hike was debated at this month’s meeting, Lagarde confirmed, agreeing with a reporter’s characterisation of the outcome as a “non-hiking decision.”

While the ECB retained its meeting-by-meeting approach, the president said that its direction of travel is clear, though it is awaiting more data to confirm its next move.

So far no second-round inflation effects from higher energy prices above those already incorporated into the latest projection rounds have been detected, Lagarde noted.

"We have paid lots of attention to second-round effects. We are very attentive and at this point we are not seeing risk of second-round effects in addition on top of what is projected," Lagarde said.

TIGHTENING FINANCIAL CONDITIONS

In its policy statement the ECB said that inflation risks were tilted to the upside from higher energy prices but that both dearer fuel and the tightening of financial conditions could also weigh on growth and inflation in the opposite direction. (See MNI SOURCES: Bond Selloff, France, Clouds ECB Dec Rate Call)

Asked about the rise in long-term bond yields, which has notably affected France, Lagarde replied that countries with high debts would have to take into consideration in their fiscal policy plans "the fact that interest rates are higher and will probably remain higher for a period of time.”

Governments should comply with the European fiscal framework, she noted, though she added that that should disorderly markets threaten the smooth transmission of monetary policy, the ECB has the tools to respond.

“The criteria and conditions under which this applies are well known,” she said.

Earlier on Thursday, the ECB announced that Lagarde would leave her position early, with her last Governing Council meeting to come in February. The ECB president said that her move was motivated by a desire to no longer remain neutral on French politics, and observed that the search for her successor was already well underway.