Aurelia Butler

JACKSON HOLE, Wyoming (Reuters) – The Bank of Japan can raise interest rates gradually as heightening inflation expectations leave further scope to normalise its ultra-loose monetary policy, the International Monetary Fund said on Friday.The speed of further rate increases will be “very data-dependent,” as the BOJ will look at the pace at which inflation, wage growth and inflation expectations heighten in normalising policy, said IMF chief economist Pierre-Olivier Gourinchas.Gourinchas said Japan’s inflation is higher than 2% and inflation expectations have started to move towards, or “maybe even a little bit above” the BOJ’s 2% target.As a result, the BOJ is normalising the extremely loose monetary policy it has had for decades, which is “certainly something that we think is a good development for Japan,” he told Reuters in an interview on the sidelines of the annual economic symposium in Jackson Hole, Wyoming.”Certainly in our assessment, there is scope for further normalisation of monetary policy going forward, and policy rates to increase gradually for some time,” he said.The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July in landmark steps away from a decade-long radical stimulus program.BOJ Governor Kazuo Ueda has signaled the bank’s readiness to keep raising interest rates if inflation makes progress toward durably meeting its 2% target, as it projects.While Japan’s economic growth will slow in 2024 from the fiscal stimulus-driven expansion last year, what is important for the BOJ is not just economic activity but inflation, Gourinchas said.Unlike other central banks that focused on taming inflation expectations, the BOJ had to pull them up from multiple decades of too-low levels, he said.”What the BOJ is trying to engineer is a realignment of inflation expectations,” Gourinchas said.”We’re expecting that as inflation expectations remain stable at their new level close to 2%, the BOJ will start normalising policy rates,” he said.The BOJ’s surprise July rate increase and Ueda’s hawkish signal jolted financial markets in August, forcing his deputy to offer dovish reassurances that no hikes would come until markets stabilise.Speaking in parliament on Friday, Governor Ueda reaffirmed the BOJ’s readiness to keep raising rates but with a close eye on the economic fallout from still-unstable markets.Gourinchas said the recent market turbulence was due to a mix of factors including prospects of higher Japanese interest rates, and weak U.S. jobs data that fueled expectations of faster-than-expected rate cuts by the Federal Reserve.Thin market trading during the August holiday season, coupled with a massive unwinding of the yen carry trade, also heightened market volatility, he said.”I think the market overreacted,” he said. “I think a lot of this has been resolved, but we could see other episodes of market volatility as markets are … in a little bit of an uncharted territory” with many central banks starting to ease policy, while the BOJ begins to raise rates, he said. More

JACKSON HOLE, Wyoming (Reuters) – The imminent rate cuts planned by the U.S. Federal Reserve are “in line” with International Monetary Fund advice that has put a premium on ensuring inflation was controlled but now sees risks shifting toward the labor market, IMF economic counsellor Pierre-Olivier Gourinchas said on Friday.”What was telegraphed by (Fed chair Jerome) Powell today is very much in line with what we’ve advocated,” Gourinchas said on the sidelines of a Kansas City Fed economic conference. “Inflation has been improving and labor markets have shown signs of cooling … If labor markets are not contributing to inflation pressures anymore … then you might ease a little bit on cooling aggregate demand and bring (the policy rate of interest) back closer to neutral.”The Fed has maintained its benchmark interest rate in the 5.25% to 5.5% range for more than a year, a level policymakers feel is curbing economic activity.In keynote remarks to the conference on Friday, Powell said bluntly that with inflation just a half-point above the Fed’s 2% target and the unemployment rate rising, “the time has come for policy to adjust,” remarks that cemented expectations for an initial rate cut at the Fed’s Sept. 17-18 meeting. Depending on the outcome of an upcoming August jobs report, some economists anticipate the initial cut may even be a larger than usual half-point reduction.The U.S. should not be “complacent” that inflation has disappeared, Gourinchas said, noting that service-sector prices are still rising and that the Fed will have to calibrate the pace and extent of rate cuts with incoming economic data.”There is still some upside risk to inflation,” he said. Yet it was also clear the U.S. job market was cooling, Gourinchas said, though from a position of strength and ongoing economic growth. “I don’t think we are in a situation where recession is imminent” in the U.S., Gourinchas said, while the odds of a soft landing “have increased and that remains our baseline.” More

Gold’s relentless climb to record highs and a dollar under pressure as U.S. rate cut speculation builds are also in investors’ sights. Here’s your guide to the week ahead in financial markets from Rae Wee in Singapore, Sruthi Shankar in Bangalore, Ira Iosebashvili in New York, Yoruk Bahceli in Amsterdam, and Pratima Desai in London. 1/ NVIDIA, YOU’RE UPInvestor enthusiasm for artificial intelligence could be tested when chipmaker Nvidia reports earnings on Aug. 28. Nvidia’s chips are seen as the gold standard in the AI-space and its shares are up around 150% this year, helping to power the S&P 500 to record highs.But the stock’s stunning, multi-year run and the AI-mania have also drawn comparisons to the dot-com craze that imploded more than two decades ago. Investors’ reaction to disappointing results from megacap names such as Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) last month suggests markets may not be in a forgiving mood, especially when valuations for many companies in the sector are stretched. Data highlights meanwhile include Friday’s U.S. Personal Consumption Expenditures (PCE) price index, a key inflation gauge tracked by the Federal Reserve.2/ WHEN SEPTEMBER COMES August euro zone inflation numbers on Friday will be key to European Central Bank policymakers deciding whether or not to cut rates in September.The data, preceded by national releases starting on Thursday, follows a small but unexpected rise in July, highlighting a bumpy last mile in curbing inflation. Headline inflation may ease as oil prices have fallen, but focus will remain on the core figure and the dominant services sector, where price growth remains stickier.Any upside surprises may warrant caution, as traders have ramped up ECB rate cut bets in recent weeks. Focus has turned to growth risks, but euro zone business activity showed surprising strength in August. Traders fully price in another 25 basis point rate cut on Sept. 12, and see a high chance of two more moves after that by year-end.3/ HIGH STAKES The stakes are high for the Reserve Bank of Australia (RBA), which has insisted that interest rates need to stay restrictive for an “extended period” since underlying inflation remains too high for comfort.Wednesday’s July inflation numbers could show headline inflation diving back into the RBA’s 2-3% target band for the first time in three years.And any signs that inflation pressures are abating could pile pressure on the central bank. It has become an outlier globally with a reluctance to lower rates while many peers look to kick off, or have already begun, easing cycles.Investors are also hoping that Wednesday’s data could provide some relief to consumer sentiment, which has taken a hit from the weight of steep borrowing costs.Elsewhere, Tokyo’s August inflation report on Friday potentially offers further clues on Japan’s rate outlook.4/ EURO BULLS The euro is at its highest this year against the dollar, benefiting from recent ructions in global markets. Diverging U.S. and euro area rate expectations are behind its gains. Traders price around 100 bps of Fed rate cuts by year-end, up sharply from before the latest U.S. payrolls data, while only fully pricing two more 25 bps ECB cuts. The question is whether the euro, also at its highest on a trade-weighted basis on record, can sustain its momentum. Germany’s business activity contracted by more than expected in August, a negative sign for Europe’s economic engine, while euro zone wage growth slowed last quarter, supporting the case for an ECB September cut.Euro bulls are a shy bunch, price action in recent years suggests. They may need more convincing of the euro’s rebound before coming out in force. 5/ ALL THAT GLITTERS Gold has hit consecutive records since 2022, and has surged over 20% so far this year. Now $3,000 an ounce beckons. The stars have aligned for the precious metal used primarily to preserve wealth during periods of heightened security risks and political and economic turmoil. Russia’s war on Ukraine triggered gold’s rally in February 2022. Soaring commodity prices in the aftermath fueled inflation, which erodes the value of monetary assets. Middle East tensions and uncertainty from the fast-approaching U.S. Presidential election have spurred further gains.Reinforcing the buy bullion trade is the prospect of U.S. interest rate cuts, pressuring the U.S. currency and boosting gold’s appeal. It has a negative relationship with the dollar.But gold bulls should bear in mind the old adage that “nothing goes up in a straight line” because markets typically “buy the rumour, sell the fact”. More

President William Ruto discarded the government’s finance bill for the year, which contained tax hikes worth 346 billion shillings ($2.69 billion), following the protests that resulted in more than 50 people being killed.    “The downgrade reflects our view that Kenya’s medium-term fiscal and debt outlook will deteriorate following the government’s decision to rescind all tax measures proposed under the 2024/2025 Finance Bill,” S&P said in a statement.    The government has since revised its budget for the 2024/25 financial year (July-June) to cut some spending and has increased the local borrowing target to cover the wider fiscal deficit.The abandoned tax increases were part of an International Monetary Fund-supported programme.     The IMF board is expected to convene next month to approve a $600 million disbursement under Kenya’s $3.6 billion lending programme, which expires next year. “Although immediate external liquidity pressures have receded slightly, Kenya’s structurally large external imbalances remain a key vulnerability,” S&P added. Despite the downgrade, the agency maintained Kenya’s outlook as stable as it expects strong economic growth and continued access to concessional external financing to offset challenges from high interest costs, slow fiscal consolidation, and structural imbalances.     Moody’s (NYSE:MCO) downgraded Kenya’s credit rating further into junk status in July, while Fitch downgraded Kenya’s sovereign rating to “B-” from “B” earlier this month, sending its dollar bonds lower. More

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$75 per monthComplete digital access to quality FT journalism with expert analysis from industry leaders. Pay a year upfront and save 20%.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print edition More