MNI BOE WATCH: Set To Hold, As Iran Deal Eases Inflation Risks

The Bank of England is expected to hold Bank Rate at 3.75% on Thursday, with a potential resolution to the Middle East conflict reducing risks of further surges in inflation, even as the number of Monetary Policy Committee members voting for a hike could rise.

The ceasefire agreement reported on Monday has led to a rapid fall in commodity prices and expectations for BOE rates. Through April next year, market pricing now implies 37.5 basis points of hikes, about 25bps less hawkish than last week.

Oil prices are now lower than assumed in even the most benign of the three scenarios presented in April’s Monetary Policy Report, which saw oil prices gradually declining from a peak of USD108 a barrel to below USD80 in 2027Q1.

But, with many analysts interpreting a recent speech by Megan Greene as suggesting that she would join Chief Economist Huw Pill in voting for a hike at this week’s meeting, and with potential for Catherine Mann and Clare Lombardelli to do so as well, the number of MPC members calling for tightening could rise even as the prospect of an increase in Bank Rate grows more remote.

Seventeen of eighteen votes across the last two meetings were holds, while only Pill voted for a hike in April.

Bailey described April’s decision as an "active hold," signifying willingness to act if necessary. At that time, the Bank noted that a looser labour market and "a weakening economy could contain inflationary pressures." (See MNI INTERVIEW: UK Jobless Drive Productivity Rise - Saunders)

Alan Taylor, generally one of the more dovish members of the committee, told an MNI Connect event last month that he judged policy to be sufficiently restrictive to keep a lid on inflationary pressures.

The April statement also noted that a tightening in financial conditions since the conflict began "will help to reduce inflation over time," although it did not quantify this effect or suggest a potential response if conditions loosened. (See MNI: Calls For BOE To Be Clearer On Financial Conditions)

The next MPR is due at the July 30 meeting, before the end of the reported 60-day U.S.-Iran ceasefire.

MNI BOJ WATCH: Uchida Flags More Hikes; No Timing Hint

Deputy Governor Shinichi Uchida said that the Bank of Japan will continue to raise its policy rate towards neutral levels after Tuesday’s 25-basis-point hike, but provided no indication as to the timing of future moves which will depend on activity and price data.

Speaking after the hike to 1%, the highest level since 1995, Uchida highlighted a growing risk that underlying inflation could deviate from the 2% target and stressed that the Bank was determined not to fall behind the curve. But he said that while the BOJ is heading for neutral, it is impossible to determine that level in advance.
“There is no other way than to assess whether the policy rate is at an appropriate policy level as we continue to raise it,” Uchida said, noting that no board member had called for a 50-basis-point hike at the meeting just concluded.

The decision to hike came as downside risks to the economy subside and the chances of realising the BOJ’s baseline scenario increase, and as there are signs of companies passing on higher costs in their pricing while underlying inflation rises, he said. (See MNI POLICY: BOJ Sees Strong CPGI Supporting Inflation)

When asked whether risks of stronger underlying CPI inflation could prompt the Bank to raise the rate again earlier, Uchida declined to comment directly. (See MNI POLICY: BOJ To Consider Faster Hikes On Underlying CPI)

"The BOJ continues to monitor developments in the Middle East war and their impact on economy and prices for the time being,” he said. “Crude oil prices are falling. Looking ahead, we need to examine how the drop in crude oil prices affect consumer prices.”

SUSPENDS JGB TAPERING

The BOJ decided to suspend its reduction of purchases of Japanese government bonds in the second quarter of 2027, meaning that it will buy about JPY2 trillion of JGBs monthly in or after 2Q 2027. Despite the decision, the balance of JGBs held by the BOJ will continue to fall steadily, as the scale of redemptions exceeds the JPY25.2 trillion that the bank buys annually.

Uchida said the decision on JGB tapering was based on considerations of market functioning and stability,  dismissing any suggestion that it was influenced by government borrowing needs.

He insisted that the Bank needs to reduce its balance sheet and JGB holdings, but that this will take time.

The BOJ estimated that its JGB holdings will fall to a range of JPY350 trillion to JPY370 trillion by March 2030, down from JPY480 trillion at the end of March 2027. But Uchida stressed that these are estimates, not binding targets.

BOJ Governor Kazuo Ueda was absent from the policy meeting. Ueda, 74, is expected to remain in hospital for about two weeks to receive treatment for an infected liver cyst, but will work remotely and attend the next policy meeting from July 30 to 31, the BOJ said.

MNI RIKSBANK WATCH: Iran News Puts Spotlight On Guidance

The Riksbank is expected to leave its policy rate on hold at 1.75% at its June meeting, while news of a potential resolution to the Iran-U.S. conflict will have come too late to be fully factored into its quarterly rates path, putting more focus than usual on Governor Erik Thedeen's comments at the press conference on Wednesday.

The previous quarterly forecasts in March had the policy rate up just a couple of basis points in Q4 and at 1.81% in Q1 2027. The new path is likely to be higher, tilting towards a hike in 2026, but Thedeen will now be able to endorse or downplay the rate path in light of unfolding events in the Persian Gulf.

Markets now price in just under a full 25-basis-point hike this year, but analysts are split over timing.

The first three quarters of the forecast are based on the Executive Board's judgement, with the rest model driven. 

Board members have been split over the likelihood of a near-term hike and at the most recent meeting did not endorse any central scenario.

Deputy Governor Anna Seim has said a rate hike could be justified and Thedeen has also made clear that he was open to tightening, as he was not prepared to allow the Riksbank to be seen to be slow to respond if inflationary pressures mounted. But their colleagues have been more neutral.

 The Swedish central bank had previously set out a higher inflation and rate scenario based on a prolonged Iran conflict, but that scenario now risks looking obsolete and it may be retired. (See MNI INTERVIEW: No Hike Delay If Shock Lasts-Riksbank's Thedeen)

MNI RBA WATCH: Bullock Keeps Hike Prospects Alive Despite Hold

Reserve Bank of Australia Governor Michele Bullock stressed that monthly economic data remain volatile and should not be overinterpreted following Tuesday's decision to leave the cash rate unchanged at 4.35%, warning further rate increases cannot be ruled out.

The largely-expected hold followed a cumulative 75 basis points of tightening this year, fully reversing the easing delivered in 2025. (See MNI RBA WATCH: Board To Hold, Maintain Tightening Bias) Bullock said the Board's decision was unanimous and that members did not actively consider a rate increase, despite concerns about upside inflation risks.

Market participants have increasingly assumed the cash rate has reached its peak, but Bullock pushed back against that view, arguing recent soft monthly data had encouraged some economists to prematurely conclude further tightening would be unnecessary. "I wouldn't be jumping on those numbers quite so firmly... Underlying inflation actually is pretty much dead on where we thought it would be," she said pointing to April's 3.6% y/y. 

"I can't rule out that if inflation doesn't respond in the way we expect it to do, then we might have to do more... I'm just not ruling that out."

Markets see the cash rate peaking at about 4.47%, with a 28% chance of a hike in August. 

LABOUR & INFLATION

Bullock cautioned against reading too much into monthly labour-force figures, noting unemployment data have been volatile throughout the year.

The RBA examines a broad range of labour-market indicators, she said, pointing to a decline in underemployment and stable or improving vacancies and job advertisements as evidence that labour demand remains firm. "The unemployment rate can go up with people still getting employment; it just takes them longer to find a job," she said.

Bullock reiterated that some easing in labour-market conditions is necessary to reduce inflationary pressures. "We think the labour market's a bit tight. We think we've got a bit of excess demand. Those things have to ease if we are going to bring inflation down."

She also highlighted persistently weak productivity growth as a medium-term constraint on the economy, noting that the RBA's assumption of around 0.7% annually implies Australia's potential growth rate is only about 2%. "If productivity isn't growing very quickly, demand can't grow much faster than 2%, and wages can't rise by very much either," she said.

Policymakers remain concerned about inflation, she continued, adding Australia already faced inflationary pressures before the Iran conflict pushed energy prices higher. The Board is monitoring evidence that higher fuel and commodity costs are feeding into broader prices through second-round effects. Should oil prices stabilise and supply-chain disruptions ease, inflation pressures would moderate.

SLOWER GROWTH

The RBA is not forecasting the economy to contract in the second quarter, but expects growth to remain subdued as demand slows toward the economy's limited supply capacity, Bullock said. 

However, slower growth should not alarm households or businesses, because it is a necessary part of returning inflation to target. "Unless demand grows more slowly than the supply side of the economy for a time, we're not going to get inflation down," she added.

Bullock suggested the RBA would not necessarily wait for inflation to return fully to target before eventually considering policy easing, noting that monetary policy must be forward-looking. "If you wait until you've got all the evidence and you're looking in the rear-view mirror, it's probably too late," she said.

MNI SNB WATCH: On Hold Despite Modest Inflation Upside

The Swiss National Bank is set to leave its key Policy Rate unchanged at 0% Thursday, with markets expecting no change in its rate settings this year.

April and May inflation slightly exceeded the SNB’s March projections, boosted not only by rising energy prices but also by private services, a trend policymakers have monitored closely in the past. But inflation remained below the midpoint of the defined range of price stability, and the average is in line with the SNB’s March forecast for the second quarter.

While market pricing sees no change in rates before a 25-basis-point hike in March 2027, some initial signs of economic momentum have raised the chances of less expansionary policy before the end of 2026.

ECONOMY

Risks of second-round effects from the energy shock persist, with the economy still showing resilience and a tightening labour market. According to some analysts, the increase in job vacancies and the stabilisation of the unemployment rate have taken the vacancy rate to mid-2023 levels and could mean continued inflation increases in coming months.

PMI and KOF sentiment surveys also showed growing business confidence, supported by a recovery in new orders. Companies report upward pressure on input prices similar to that of 2021 and 2022.

FOREX

The franc has depreciated modestly since the March meeting, when the SNB shifted its FX language to signal "increased" willingness to intervene, and with increased rate hike expectations for the ECB and the Federal Reserve. The franc was last at 1.2620 vs the dollar, versus USD1.3000 at the time of the March meeting.

Barring new shocks, the exchange rate appears less of a concern than in the past, but, with the SNB having made clear the forex channel is likely to be its main policy tool in coming quarters, no significant change is expected in the statement language.

MNI: Fed Dots To Show Steady Rates For 2026 - Ex-Staff

Federal Reserve projections for interest rates are set to float upward this week, with the median likely to show steady policy in the second half of the year before some modest easing in 2027, former Fed staffers told MNI.

The central bank's fresh Summary of Economic Projections will likely show the stagflationary imprint of the Middle East conflict, with growth revised a couple of tenths lower in 2026 and 2027, headline PCE inflation revised higher, and core PCE inflation revised closer to 3.0%. 

The dot plot should show a median of no rate cuts in 2026, with the fed funds rate at 3.6%, and interest rate easing by the end of 2027, the ex-staffers said. 

"My expectation is they'll be on hold and I don't think the center of the committee has hikes in their outlook yet," said Kurt Lewis, former special adviser to ex-Fed Chair Jay Powell. "There will be some people who call for it, but I don't think the center of the committee has hikes in their outlook yet. My expectation is that there will be a handful of people who call for hikes, but the vast majority will be on hold."

RATE CUTS

Additional easing steps for the FOMC as a whole likely won't come until 2027, assuming inflation recedes over time and inflation expectations are anchored, the ex-staffers said. (See MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis)

William English, former director of the division of monetary affairs at the Fed Board, highlighted various scenarios for the economy but suggested interest rate cuts are likely next year. A higher long-term interest rate, however, could limit further cuts in later years, he said. 

"I think probably they'll have a funds rate that's basically flat, maybe until the end of next year, maybe it comes down a step at the end of next year. I'd be a little surprised if the median forecast was for a rate hike, but it could be," said English, now at Yale University. 

For this year, a minority of policymakers at the Fed are likely to project higher rates due to the energy shock, sticky inflation and the resurgent labor market, the ex-officials said. (See  MNI INTERVIEW: Fed Can’t Ignore Mounting Price Pressures-Liang)

Eric Swanson, a former San Francisco Fed economist, expects several Fed officials to pencil in higher borrowing costs. "I'm sure some of the members are going to have hikes in there, given what inflation is doing and the job market's pretty good. If I was an FOMC member, I'd be putting some hikes in for this year and next year," he said. 

HIGHER INFLATION

Former staffers expect the FOMC to change the sentence in its policy statement to eliminate the easing bias and are also foreseeing some upward revisions in the Fed's SEP forecasts for inflation as well as downward revisions to the central bank's growth projections. The Fed in March saw the economy expanding 2.4% this year, headline PCE ending the year at 2.7%, and unemployment at 4.4%. 

"I expect the median to show no cuts this year but perhaps a couple next year. I expect PCE inflation projection to rise above 3% in 2026 but core PCE to inch up only to 2.8% with little change to either in 2027. Unemployment may tick down in 2026 but only by a tenth or two," said Joseph Gagnon, former economist at the Federal Reserve Board of Governors.

The pass-through of the energy shock to core measures has been clear in the data, though perhaps not as much as some had feared, former Richmond Fed economist Peter Ireland said. 

"These same recent data support a consensus view that keeps monetary policy on hold for now, while still allowing for rate cuts later this year or next if inflation is seen falling back towards target," he said. "Probably, a few of the dots from March will shift up for both 2026 and 2027.  My guess, however, is that the modal dot for 2027 will still be at 3.00-3.25, suggesting two more rate cuts by the end of next year."

MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored

Inflation expectations have remained anchored to the Bank of England's 2% target following the Iran shock, though less securely, and assessing how well they are holding firm will be a significant factor for policymakers in upcoming meetings, London School of Economics professor and academic consultant at the BOE Ricardo Reis told MNI.

Using decomposed inflation swaps data, Reis and BOE economists found that market participants' inflation expectations had risen more in the UK than in the U.S. and euro area since the start of the Iran conflict, but remained close to the target.

The work provides "a very clear measure of the long-run anchor and the short run, the one year and the 10 year [and] ... they moved a little bit, but not to the point of it seeming that we're lost," Reis said.

One-year expected inflation in the UK has risen by around 0.8 percentage points since the conflict began, higher than the 0.4 percentage points seen in both the euro area or the U.S., the cleaned data show. UK 10-year expectations are only up about 0.2 percentage points.

While some have argued that the surge in inflation following Covid and the invasion of Ukraine de-anchored inflation expectations, leaving the BOE less room to look through price rises this time around, Reis said the data do not support this. (See MNI INTERVIEW: Oil Shock Means Europe Needs Higher Rates)

"The anchor is back in place, but it's not quite as deeply in the sand as it was," he said, adding that expectations have tended to move more than previously but in both directions in response to relatively small changes in inflation. Not even the Iran shock has dislodged the anchor, he said, though “it has moved a little bit.”

KEY SIGNAL

This signal within the inflation swaps data "is what policy makers are measuring on a day-to-day basis, and absolutely one of the big inputs into the decisions in the next two or three rounds,” of central bank decisions, he said.

Reis, along with co-authors including BOE research adviser Robert Czech and research manager Saleem Bahaj, decomposed inflation swap rates into a fundamental, or risk neutral component and a frictional one, with the latter capturing moves due to supply or demand constraints. They found that UK fundamental one-year inflation expectations rose by 0.84 percentage points from the time when the Iran war started up until a couple of weeks ago.

"It doesn't seem to have moved a lot," Reis said, but he added that this could change and that central bankers are saying that while there is no reason for aggressive hiking "we're looking at the measures, and all cards are on the table for the next policy meetings.”

The BOE is expected to keep Bank Rate unchanged at its meeting this week, though markets price in a hike by December.

LOW PASS THROUGH FROM ENERGY PRICES

Other, recently-updated, work by Reis has found that energy price rises alone have only a slight effect on inflation expectations.

"People respond more to energy prices than they do to any other piece of information, but still not that much to energy prices, so the first impact on inflation expectations is not that big," he said.

A doubling of the price of electricity raised expected inflation by a bit less than a percentage point, his work found.

The scale of the shock to expectations is determined by how it "transmits to other goods, including food [and] ... that depends not just on the energy component of the good as much as it does on how credible the central bank is, the actions it takes," he said, adding that other factors, including the fiscal policy response, also had an impact.

UK energy prices were two to three times higher than in the U.S. before the shock, but rather than amplifying the impact on inflation, this disparity “goes in the opposite direction, because energy prices in Britain had been falling in the last 12 months. They're still high, but they've been falling.”

Households might place more weight on the fact that their own "energy price, no matter what's happening in Iran, is still lower than it was 18 months ago," Reis said.