Aurelia Butler

TOKYO (Reuters) – The Bank of Japan’s surprise decision last week to raise a cap on interest rates was partly driven by policymakers’ growing worries ultra-loose monetary settings would spark a repeat of the bruising yen selloff that the economy saw last year.The tweak to the BOJ’s bond yield curve control (YCC) was the result of brainstorming sessions that came to a head in May, say sources familiar with the decision, just over a month after Kazuo Ueda succeeded his dovish predecessor Haruhiko Kuroda as the bank’s chief.Pressure from Prime Minister Fumio Kishida’s government also played a part, suggesting that future policy tweaks will be driven not just by the inflation outlook but market moves – notably the yen, the sources said.”Yen moves have been and will remain a very important factor shaping Japan’s monetary policy,” one of them said. “The BOJ made that point clear this time in a way unseen in the past.”The BOJ’s decision shook markets on Friday and contrasted sharply with Ueda’s more cautious comments in recent months about the dangers of retreating too quickly from accommodative Kuroda-era policies.The focus on yen moves also means policymakers are now prioritising dealing with the side-effects of decades of massive monetary stimulus, such as Japan’s yawning interest rate gap with economic peers that has pummelled its currency.”Deep inside, Ueda probably feels the role of YCC has ended and is worried about its side-effects,” said an official who has known Ueda for decades. “There’s also a small but probable risk of inflation overshooting in Japan, which gave the BOJ reason to act.”This account of the BOJ’s decision last week is based on conversations with over a dozen government officials, Kishida administration aides and sources with direct knowledge of the central bank’s deliberations.Most spoke on condition of anonymity as they were not authorised to speak publicly, or declined to comment on record due to the sensitivity of the matter.Last week’s move means the BOJ will likely refrain from further tweaks to YCC unless inflation perks up much faster than expected and keeps the 10-year yield elevated near the new 1% ceiling, the sources said.More substantial moves toward policy normalisation, such as interest rate hikes, will come after close scrutiny of data for clues on next year’s wage and inflation outlook, they said.”It’s clear the direction the BOJ is taking is towards an exit from easy policy,” a third source said. “But it will take time, perhaps the entire five-year term for Ueda.”NEW PRIORITIESThe BOJ’s policy decision last week signalled to investors that it would now allow the 10-year government bond yield to move closer to 1% before it intervenes.Under YCC, first introduced in 2016, the central bank seeks to rev up stagnant consumer demand by keeping credit extremely ample, specifically by guiding short-term rates at -0.1% and the 10-year bond yield around 0%.That policy runs smoothly when inflation and economic growth are subdued, but hits trouble when prices creep up, as they have over the past year, putting upward pressure on the 10-year bond yield and forcing the BOJ to ramp up bond buying.The BOJ’s relentless defence of its yield cap last year in particular drew the ire of Kishida’s administration for fuelling sharp yen falls that inflated import costs and household expenses.Since the yen hit a 23-year-low in September last year, the government has frequently prodded the BOJ to make its ultra-easy policy more flexible, in part to prevent low Japanese yields from stoking further currency declines, the sources said.When asked about the role the government played in the BOJ’s July decision, Chief Cabinet Secretary Hirokazu Matsuno told reporters on Thursday he was not aware of any government intervention. He also said the government “always communicates closely with the BOJ,” but declined to comment on specifics.A BOJ spokesperson did not respond to Reuters’ request for comment.As the yen renewed its fall in May, a handful of bureaucrats at the BOJ’s elite monetary affairs department began brainstorming ideas on how to loosen the bank’s grip on yields.Their mission was to avoid a recurrence of last December, when the BOJ relented to market pressure and abruptly raised the yield cap – stoking speculation of an early end to easy policy.The stakes are high, not just for Japan but global financial markets.After three decades of extremely low interest rates, any sign of monetary tightening risks triggering a spike in the cost of funding Japan’s huge public debt, and creating disruptive shifts in global asset allocation.The key was therefore to allow rates to rise, without giving markets the impression the BOJ was moving towards policy normalisation.That meant Ueda would need to pitch the move as aimed at prolonging the lifespan of YCC.’BIT BY BIT’The shift in thinking gained momentum at the BOJ’s June policy meeting, but not enough to turn the tide.While one board member called for an early review of YCC, most saw no need to take immediate action. Dovish board members like Seiji Adachi and Asahi Noguchi also publicly ruled out the chance of an early YCC tweak.After that, however, Ueda and his deputies started dropping subtle hints of a tweak by drawing more attention to the side-effects of YCC and changing the way they described recent inflation.Deputy Governor Ryozo Himino told Reuters in late June that inflation was stronger than previously projected and driven increasingly by domestic demand.A week later, Deputy Governor Shinichi Uchida told the Nikkei newspaper the BOJ would decide whether to modify the yield cap by scrutinising “the impact it had on financial intermediation and market function.”The government kept applying pressure on the BOJ to pay more attention to currency market consequences of its policy.Uchida, a career central banker who masterminded many of the BOJ’s unconventional policies, liaised with the government and kept in close contact with Japan’s top currency diplomat Masato Kanda.As the yen slid to a two-week low near 142 to the dollar, Kanda suggested on July 21 that growing inflationary signs could prod the BOJ to soon tweak its approach to stimulus.The BOJ made tweaks to YCC at the meeting held a week later, saying the move was aimed at mitigating side-effects such as “volatility in the exchange-rate market.”Deputy governor Uchida told reporters this week that preventing exchange-rate volatility would be among factors the central bank would emphasise in guiding policy.Uchida’s comments marked a rare foray by the BOJ into concerns about foreign exchange, which historically comes under the purview of the government.”The BOJ already controls Japanese bond yields,” said a fourth source. “It can’t fully control yen moves but at the very least, it can be more mindful of their impact on the economy.”However the BOJ frames the move, some analysts see the July action as the first step towards policy normalisation. While the 0.5% cap for the 10-year yield remains in place, it is now obsolete with a new effective ceiling of 1.0% set last week.The BOJ will now intervene only when the 10-year yield creeps near 1% – a level its staff don’t think will be reached under current economic conditions.”Last week’s move made YCC quite a flexible scheme. It was a test case, or a preliminary exercise, toward future policy normalisation,” said former BOJ board member Takahide Kiuchi.”It’s an example of how the BOJ will chip away at Kuroda’s legacy stimulus bit by bit.” More

1. Futures edge lower after sell-offU.S. stock futures pointed into the red Thursday, a day after a U.S. credit rating downgrade by ratings agency Fitch sparked a sell-off on Wall Street.At 05:18 ET (09:18 GMT), the Dow futures contract lost 85 points or 0.24%, S&P 500 futures shed 12 points or 0.28%, and Nasdaq futures dipped by 55 points or 0.36%.The benchmark S&P 500 posted its biggest drop since April in the prior session, while the tech-heavy Nasdaq Composite slumped to its worst day since February.Fitch lowered the U.S.’s long-term foreign currency issuer default rating to AA+ from the top-most level of AAA on Tuesday, citing worries around the country’s fiscal position and governance standards. The announcements cooled a series of recent gains for stocks.Attention will likely now turn back to this week’s flurry of corporate earnings, with tech giants Amazon and Apple set to report their latest quarterly results after the closing bell.On the economic calendar, investors will have a chance to parse through weekly jobless claims data, which will serve as a prelude to the release of the all-important U.S. jobs report for July on Friday.2. Qualcomm’s sales forecast disappointsQualcomm (NASDAQ:QCOM) has unveiled sales guidance for its fiscal fourth quarter that missed expectations and announced plans to slash jobs as recent weakness in the smartphone market failed to ease.The U.S. chip designer said it now expects revenue in the current three-month period to come in between $8.1 billion to $8.9 billion. Analysts had seen the figure at $8.70B.A slump in end-user demand for handsets, along with many smartphone makers choosing to use existing chip supplies to manufacture their devices, both factored into the outlook, the company noted. The smartphone market has faced headwinds as inflation-conscious customers rein in spending on non-essential items and replacement cycles lengthen. According to research firm Canalys, global smartphone shipments dropped by 13% in the first quarter of 2023.Adding to these underlying issues, the San Diego-based business said it now does not foresee “any material revenue” from Huawei because it does not have a license to sell 5G chips to the Chinese telecom group. Qualcomm also flagged that it would likely be hit with “significant” restructuring charges linked to workforce reductions.Shares in the firm fell sharply in premarket U.S. trading.3. Apple and Amazon aheadMajor tech sector bellwether Apple (NASDAQ:AAPL) and e-commerce behemoth Amazon (NASDAQ:AMZN) are scheduled to announce their quarterly earnings Thursday, in two of the most closely-watched releases in what has been a busy week of corporate results.For Apple, analysts mostly expect the California-based iPhone maker to report a third straight quarter of declining revenue. The focus will likely be on any details the company may choose to give about its current quarter, which ends in September.Apple’s fiscal fourth quarter, which typically includes new smartphone releases and back-to-school laptop purchases, can be a signpost for the company’s performance heading into the critical holiday season. But the period may have even greater influence this year, as it could provide clues into whether the U.S. economy can avoid a broader meltdown after a string of aggressive Federal Reserve interest rate hikes.At Amazon, the group’s key cloud computing division will be in the spotlight.Bellevue, Washington-based Amazon previously flagged that a deceleration in growth in the prior quarter at the unit, Amazon Web Services, continued into April. The slowdown may be reflective of a broader weakness in cloud spending as inflationary pressures persuade clients and individuals to pull back on some tech expenditures.Meanwhile, as it was with their Big Tech peers last week, executives at both Apple and Amazon may also field questions from analysts about their plans to integrate artificial intelligence into their operations.4. Adidas sees smaller 2023 loss after Yeezy destockingAdidas (ETR:ADSGN) has narrowed its projected 2023 loss thanks to strong demand for the leftover stock of its Yeezy shoe brand, the German sports apparel group said on Thursday.The company had halted sales of the sneaker after it cut ties with designer Ye last year following antisemitic remarks made by the rapper formerly known as Kanye West.In order to avoid a deep write-down on its remaining stock of Yeezy-branded products, Adidas announced in May that it would sell some of this inventory and donate the proceeds to different charities that fight antisemitism and racism.In the second quarter, these sales generated around €400 million (€1 = $1.0926), leading Adidas to reduce its expected annual loss to €450M, down from its prior guidance for a loss of €700M. Adidas also earmarked €110M for charitable donations.Analysts cited by Reuters said that a second batch of Yeezy stock sales will likely attract solid demand as well, albeit not as profitable as the initial release. Adidas noted that its full-year outlook does not include the impact of another Yeezy stock drop.5. Oil retreats amid signs of tightening supplies, Fitch downgradeOil prices fell Thursday on worries about the global economic outlook, even after a record drop in U.S. inventories indicated a substantial tightening in crude markets.Official data, released Wednesday, showed that U.S. crude inventories shrank by over 17 million barrels in the week to July 28 – the biggest drop recorded in data stretching back to 1982.The Fitch downgrade of the U.S. credit rating also dented risk appetite for a second consecutive day, weighing on oil prices. In the prior session, crude fell from more than three-month highs in the wake of the ratings agency’s announcement.By 05:11 ET, U.S. crude futures traded 0.18% lower at $79.35 a barrel, while the Brent contract dropped 0.24% to $83.00. More

Good morning. The initial plan today had been to reflect on Fitch’s downgrade of US debt, but we could find no reason to dissent from the consensus view of the rating agency’s view: that the report is both irrelevant to the bond market and very oddly timed. So we skipped it. We’re more interested in what Apple and Amazon results — both of which come today — have to say about the US economy. Email us: [email protected] and [email protected]. Long bonds and equitiesLong Treasury yields are approaching the highs that they hit back in the autumn of last year, in both nominal and inflation-adjusted terms:This fact has not attracted much comment, perhaps because of the cheery mood in markets generally and because there is plenty of other news. Still, I think it’s a big deal and demands some reflection, not least among equity investors, who have (at least until yesterday) been enjoying a stonking 2023 rally. Bond yields and stock valuations do not (as is often assumed) have a regular relationship through time, but there is some reason to think that, at the current moment, rising yields and the hot stock market are in tension. It is odd, from one simple point of view, that long yields should rise just as worries about inflation are falling away. While inflation and Federal Reserve policy are most tightly linked with short rates, long rates are just the sum of expected short rates through time, plus a term premium. The term premium is currently negative. So recent evidence of disinflation should, all else being equal, tamp down long yields, because short yields are likely to have peaked.This was the basic thinking behind our newsletter of a few weeks ago arguing that owning log-dated bonds was becoming more appealing: The 10-year Treasury yield has not moved much since the autumn of last year, but the inflation situation is both clearer and more benign. Rates volatility appears to be easing off. If we are on the way back to normal after a bout of supply-shock inflation, then locking in a 3.8 per cent yield for 10 years — when pre-pandemic long yields were quite consistently below 3 — seems like a logical bet.Well, 10-year yields are nearly 4.1 per cent now, and the inflation outlook is the same, so that story should be even more compelling now. But inflation is only half the story, of course. The news about growth has been good, too. This means implied probabilities of recession are down, which should reduce the appeal of risk-free Treasuries, and push yields up. Our excellent colleague Kate Duguid points out that the biggest recent daily move up in long yields came on July 27, the day of the ebullient report on US GDP in the second quarter.The growth-based story fits with the recent negative correlation between bond prices and equity prices. Stocks have risen alongside yields in recent weeks, as they often do when growth is solid and inflation fears are under control. But high yields are not only a reflection of good growth prospects. I asked Bob Michele, chief investment officer at JPMorgan Asset Management, what he made of the recent move up in long bonds. His reply: The market is pricing in a Fed that will remain restrictive for a long period of time.We prefer to look at yields in real terms. While 10-year real rates have risen to cycle highs, it is because front-end real yields (most often associated with policy stance) have continued to move higher. In fact, 5-year real yield 5-year forward [that is, the implied 5-year real interest rate five years from now] are within the range they traded since December, while 2-year and 5-year real rates are at or above the cycle highs (3% and 2%, respectively). It remains to be seen how well the economy can handle such restrictive policy rates. We see 10-year yields at these levels reflecting attractive valuations in both real and nominal terms.In other words: higher longer yields now reflect tight monetary policy, but that restrictive policy may well depress growth — meaning lower rates later. So buying duration makes sense.Unhedged would push Michele’s interpretation a step further and suggest caution about stocks, which might not enjoy such a firm economy for much longer (as we argued yesterday). Making matters worse for stocks, high real yields give investors an attractive alternative. Days like Wednesday, when yields rise and stocks fall, fit with this logic.Our view comes with an asterisk, however. Several of our contacts and colleagues have pointed out technical or structural reasons for rising long yields, none of which are directly related to US monetary policy, inflation and growth. These include the effect on Treasury demand of the Bank of Japan’s loosening of yield curve control; traders’ closing of profitable “curve flattener trades” (buy the long end of the curve, sell short the short end); mortgage convexity hedging; and the Treasury’s recent announcement of greater impending issuance of new long-term debt. Depending on how much influence you think these factors have on long yields, and how long you expect that influence to last, your appetite for duration will vary. Still, we are inclined to keep it simple. One does not have to equate higher bond yields with lower equity valuations to think that, in the current moment, rising long yields will put pressure on stocks. Those yields reflect restrictive monetary policy that will probably depress economic growth and present an attractive alternative to stock ownership.One good readPatrick Radden Keefe has written an insightful profile of the art dealer Larry Gagosian for The New Yorker — a much more detailed portrait than my much shorter effort on the same subject for How To Spend It. More

Investors are increasing bets Europe will sink into a painful economic downturn, in a growing contrast to the conviction in financial markets that the US is headed for a “soft landing”.The euro has fallen against the dollar over the past two weeks, while the surprise ascent of European shares this year has stalled, and German government bonds — investors’ preferred retreat in times of stress — are gaining in price.The shifts show growing confidence among fund managers that economic indicators in the eurozone are weakening in the face of higher borrowing costs, while the US has demonstrated resilience despite the most restrictive interest rate environment in 22 years.“We’ve seen a lot of interest rate hikes in the US, but demand and growth are strong,” said Ario Emami Nejad, portfolio manager at Fidelity International. “The European growth dynamic is weak; we think the [European Central Bank] has made a policy mistake and they will recognise this late,” he added, referring to the idea that the ECB has hoisted borrowing costs too high and will be forced to cut them.Official figures last week showed the US economy grew at an annualised rate of 2.4 per cent in the second quarter, well above what economists had forecast, while the US Federal Reserve’s preferred gauge of inflation cooled more than expected in June, bolstering expectations it can soon call time on its rate-raising cycle. Meanwhile, Europe has been teetering on the brink of recession, while services inflation in the eurozone hit a record of 5.6 per cent in July.Analysts said interest rate rises had been less successful at bringing down inflation in Europe than the US, because a larger proportion of inflation had been down to the damage inflicted in food and energy supplies by Russia’s all-out invasion of Ukraine.In the first half of this year, European equity markets were a surprise hit, confounding analysts’ almost universal expectation of declines. Instead, a relatively mild winter and easing of the region’s energy crisis helped the continent to avoid a deep shock, and propel the Stoxx Europe 600 index 8.5 per cent per cent higher in the first six months of the year. Those gains have gone into reverse midway through a disappointing second-quarter earnings season. Companies on the Stoxx 600 are on track to deliver their biggest decline in quarterly profits since the early stages of the Covid-19 pandemic, reporting a 17 per cent year-on-year drop in earnings per share in the second quarter, more than double the fall of US rivals in its benchmark S&P 500. Accordingly, the share price gap with Wall Street has widened. The S&P 500 is up almost 20 per cent this year, helped in part by enthusiasm over artificial intelligence — an area dominated by US companies.“If you look at the equity valuations, they’ve been much higher in the US than in Europe and the rest of the world for quite some time,” said Tim Murray, a multi-asset capital markets strategist at T Rowe Price. “There was a little bit of narrowing and now that’s widened back out. In the US, the narrative is we’re going to get the soft landing and avoid recession”, he added, “whereas I think in Europe, there’s still a lot of doubt about that.”The picture is similar in other parts of the financial markets. The euro has fallen 2.6 per cent against the dollar since mid-July, and in government bonds, the gap between US 10-year borrowing costs and those of Germany — Europe’s biggest economy — has widened to its highest level this year.That so-called spread hit its narrowest point since 2014 in April this year, but has since expanded as US economic data improved relative to the eurozone, hitting 1.6 percentage points on Wednesday. Kevin Thozet, a member of the investment committee at Carmignac, said that dynamic had pushed him to offload some US Treasuries in favour of German government bonds, which would rally in the event of a full-blown European recession. “When we consider the two economic blocs, Germany is the region where we see the most economic weakening,” he said.Figures from BNY Mellon, custodian to about a fifth of the world’s financial assets, show non-US investors have made net sales of about $50bn of US Treasuries since the start of the year, while Bunds have attracted close to $4bn of net inflows from non-eurozone investors over the same period.Investors have also been buying UK government bonds in recent weeks, with 10-year gilt yields falling 0.25 percentage points from a peak in early July, as investors bet aggressive rate rises from the Bank of England to deal with the UK’s outsize inflation problem would soon result in economic pain.“We are more positive on gilts than we have ever been,” said Eren Osman, managing director at the private bank Arbuthnot Latham. “If you believe there will be a recession, government bonds are the asset class you want to be in.”The price of bonds issued by companies also show expectations of a rosier outlook for the US over Europe. The premium paid by lowly-rated US companies to issue bonds is hovering around its lowest in 16 months, with the “spread” over government debt standing at 3.82 percentage points — down from 4.81 percentage points at the end of 2022.Eurozone junk bond spreads remain much wider, having shrunk by a more modest 0.7 percentage points to 4.32 percentage points this year, according to the ICE BofA Euro high-yield index.Additional reporting by George Steer More

The final au Jibun Bank Japan Services purchasing managers’ index (PMI) slipped to a seasonally adjusted 53.8 last month from 54.0 in June. The pace of growth in July eased to the slowest since January. That compared with the flash reading of 53.9 and remained well above the 50-threshold separating expansion from contraction for the 11th straight month. The index hit a record high in May. “Growth in business activity continued to soften from the record highs seen earlier in the year, but remained solid overall,” said Usamah Bhatti, an economist at S&P Global (NYSE:SPGI) Market Intelligence. Respondents of the survey cited some concern as new business growth slowed and outstanding business fell. “Inflationary pressures, which are also impacted by the weak yen, remain a key downside risk to private sector activity and the Japanese economy as a whole,” he said.The subindex for new business grew at the slowest pace in six months with some firms saying the loss of national travel subsidies weighed on their sales. Outstanding business slipped below the 50.0 threshold for the first time since July last year partly on a fall in new contracts and economic uncertainty. Cost pressure for service provider accelerated for the first time in three months in July amid reports of higher costs of fuel, electricity, materials and labour. The subindex for employment fell for the first time since January as firms didn’t replace voluntary leavers, particularly those who had retired.On the positive ledger, foreign visitors continued supporting the services sector amid strong demand for travel and tourism from abroad following the end of COVID curbs a few months ago.The composite PMI, which combines the manufacturing and services activity figures, stood at 52.2 in July from 52.1 in June, staying above the break-even 50 mark for the seventh straight month. More

The technical team previously forecast Colombia’s economic growth at 1% for this year.The revisions in the team’s quarterly monetary policy report follows the unanimous decision by the bank’s board on Monday to hold the benchmark interest rate stable at 13.25% for the second month in a row.Colombia’s 12-month inflation through June 30 hit 12.13%, slightly below the 12.2% expected by analysts who were consulted for a Reuters poll. The technical team forecast that inflation would end 2024 at 3.5%, close to the bank’s long-term target of 3%, but above a previous forecast of 3.4%.”The cumulative effects of monetary policy decisions and the dissolution of some of the shocks that have affected prices will contribute to inflation approaching the target in 2024,” the report said.The new estimates are “subject to a high degree of uncertainty,” the report said, citing external factors like global political tension and internal factors, such as uncertainty as to whether or not the government will pass reforms through Congress.The current economic context suggests the board should maintain a contractive stance on monetary policy to bring inflation towards the target, the report added.Most analysts expect the board will start cutting the interest rate in September or October to avoid greater impact on growth, though Finance Minister Ricardo Bonilla said cuts would depend on further deceleration of inflation. President Gustavo Petro said this week he also expects rate cuts from September.Analysts expect the board to cut the benchmark interest rate to 11.75% by the end of this year, before lowering it further to 7.25% at the end of 2024. More

BENGALURU (Reuters) – The U.S. dollar will hold its ground against most major currencies over the coming three months as a resilient domestic economy bolsters expectations interest rates will remain higher for longer, according to FX strategists polled by Reuters.Despite net short dollar positions hitting their highest since March 2021, the greenback has gained nearly 3% from its lowest in more than a year on July 14 amid receding expectations for Federal Reserve interest rate cuts.Renewed strength in the dollar coincided with a dent in the euro’s stellar run over the past few weeks – it is still up roughly 2.4% against the dollar for the year – on firming expectations the European Central Bank is done hiking rates.The dollar is unlikely to give up recent gains in coming months, according to the July 31-Aug. 2 Reuters poll of 70 FX strategists, which showed most major currencies would not reclaim their recent highs for at least six months.In response to an additional question, 27 of 40 FX strategists said net short USD positions would either not change much or decrease over the coming month, suggesting the dollar would be rangebound.”The Fed delivered what very well might have been the last hike of the cycle. Inflation is falling and labour market rebalancing has come a long way. Typically, these conditions often coincide with a more negative dollar outlook,” said Kamakshya Trivedi, head of global FX at Goldman Sachs (NYSE:GS).”We still think that is the right direction, but think dollar depreciation will be shallow, bumpy and differentiated…dollar assets will provide a hard bar to beat for some time to come.”Meanwhile, the euro’s recent rally has likely come to a halt and it will trade around the current level of $1.10 in three months based on the view the ECB is done.”Do we have more ground to cover? At this point in time I wouldn’t say so,” said ECB President Christine Lagarde last week after delivering a widely anticipated 25 basis points (bps) rate increase.”The euro comes into August with short-term rate differentials drifting against it and long EUR futures positions looking vulnerable. Something needs to happen to boost confidence in another 25 bps ECB hike, or the positioning will drag EUR/USD down,” noted Kit Juckes, chief FX strategist at Societe Generale (OTC:SCGLY).”Unless, of course, the U.S. data this week are bad enough to shift the conversation back to when the Fed will start easing. So, data-sensitive, but if all the data is dull, the euro has a problem this month.”In contrast, the Bank of England, which is set to deliver a 25 bps rate hike later on Thursday with a significant risk of a larger 50 bps move, is expected to hike far more than its major peers.Sterling – one of the best-performing G10 currencies this year – was forecast to gain only mildly to trade at $1.28 from the current level of $1.27 in the next six months, a slight upgrade from last month.But the Japanese yen, which has lost around 9% against the dollar this year, was expected to stage a comeback and gain over 6% to trade at 135/$ in six months as the Bank of Japan is expected to tweak its yield curve control further.(For other stories from the August Reuters foreign exchange poll:) More

SAO PAULO (Reuters) -Brazil’s central bank kicked off its rate-cutting cycle more aggressively than expected on Wednesday, reducing its benchmark interest rate by 50 basis points and signaling more of the same in the months ahead due to an improving inflation outlook.The bank’s rate-setting committee Copom cut its Selic policy rate to 13.25%, as just 10 of 46 economists surveyed by Reuters had anticipated. The rest expected a smaller reduction of 25 basis points.Brazil’s first rate cut in three years came after policymakers held borrowing costs steady since September 2022, following 1,175 basis points of rate hikes to battle inflation, the world’s most aggressive monetary tightening at the time.Although Wednesday’s policy decision was closely divided, Copom’s policy statement signaled a shared outlook to keep up the pace of rate cuts in coming months.”If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings,” policymakers wrote, calling that pace appropriate to keep inflation under control.”The relatively dovish tone … suggests that policymakers’ inflation concerns are dissipating more quickly than we’d anticipated,” said William Jackson, chief emerging markets economist at Capital Economic, in a note to clients. “As a result, we now expect interest rate cuts to be more front-loaded,” he added, revising his year-end Selic forecast to 11.75%, down from a previous forecast of 12.50%.Wednesday’s rate decision reflected a split among board members, with five votes in favor of the 50-basis-point cut and four votes for a more modest 25-basis-point cut.It was Copom’s first policy meeting to include two of President Luiz Inacio Lula da Silva’s nominees to the central bank’s board, whom central bank chief Roberto Campos Neto joined in voting for the more aggressive interest rate reduction.Lula has publicly criticized Campos Neto, a holdover from his right-wing predecessor, for keeping borrowing costs stable despite falling inflation. Finance Minister Fernando Haddad had called for a rate cut of 50 basis points earlier on Wednesday.Haddad later cheered the decision, praising Campos Neto for his openness to dialogue and promising “harmony” between fiscal and monetary policy.Lula’s leftist government has eased investor concerns with new fiscal rules in Congress and a landmark reform on consumption taxes. Fitch Ratings recognized progress on the government’s economic agenda in a decision last week to upgrade Brazil’s sovereign rating. Cooling economic activity and a stronger exchange rate have also helped to bring consumer inflation in Brazil down to 3.19% in the 12 months to mid-July, dipping below the central bank’s official target of 3.25% for this year.Inflation is expected to pick up again in the second half of the year, due to less favorable base effects. The central bank updated its 2023 inflation projection on Wednesday to 4.9%, from 5.0% in June.Copom said rate cuts are consistent with its strategy to bring inflation down to its target over the relevant horizon for monetary policy, which now includes 2024 and 2025, to a lesser extent.Brazil’s inflation target is 3% for both years. Policymakers said in their statement that they now see consumer prices rising by 3.4% in 2024 and 3.0% in 2025. More