Bank of Japan Governor Kazuo Ueda stated that the Middle East conflict poses both upward risks to prices and downward risks to the economy, making policy responses extremely challenging. He did not provide a clear signal regarding this month's interest rate decision, marking a stark contrast with the explicit hints given prior to the previous two rate hikes.
Bank of Japan Governor Kazuo Ueda emphasized the challenges faced by policymakers, who need to address both upward price risks caused by conflicts in the Middle East and downward economic risks. Ahead of this month's policy decision, he did not send a clear signal on interest rates.
"The current situation involves a significant shock brought about by rising energy prices. This brings both upward risks to prices and downward risks to the economy," Kazuo Ueda told reporters in Washington on Thursday after attending the G20 meeting of finance ministers and central bank governors.
He said, "This is why policy responses are extremely difficult. It is not easy to provide a blanket answer."
Kazuo Ueda carefully balanced his stance on policy issues, avoiding committing himself to any particular position. This may have been his last opportunity to signal the market ahead of the April 28 interest rate decision. In addition to deciding the benchmark interest rate, next week’s meeting will also release updated economic forecasts, which are expected to raise inflation projections while growth forecasts may be revised downward.
"Overall, taking into account factors such as the potential duration of the shock and other economic conditions, we will ultimately choose the most appropriate response to consistently achieve the 2% inflation target," Kazuo Ueda told reporters.
Before the previous two interest rate hikes, Kazuo Ueda had given clear hints to ensure that the market was prepared for the outcome. Many had anticipated a similar pattern before the escalation of hostilities in the Middle East. However, expectations of a possible rate hike have since receded.
In a speech at the Bank of Japan on Monday, Kazuo Ueda also highlighted growing uncertainty, and this trend has further strengthened since then.
Earlier this week, economists at Barclays postponed their forecast for an interest rate hike from April to June, citing difficulties for authorities in assessing the risks facing their outlook.
Overnight swap indices show that the market currently sees about a 19% probability of the Bank of Japan raising its benchmark interest rate to 1% this month, down from around 55% after the breakdown of US-Iran talks over the weekend. The likelihood of a rate hike by June rises to 76%.
Kazuo Ueda noted that central bankers’ responses to the Middle East crisis depend on each country’s economic and price conditions, as well as the financial environment at specific points in time.
"However, if I may add one point, in the case of Japan, even when looking at the medium-term range, real interest rates remain very low," said Kazuo Ueda. "In that sense, the financial environment is highly accommodative. With that in mind, we aim to continue making various decisions."
Editor/Joe