Crucial Interest Rate Decisions by U.S. Federal Reserve, Bank of Japan, and European Central Bank to Shape Monetary Policy Trajectory

The U.S. Federal Reserve, Bank of Japan, and European Central Bank will all announce important interest rate decisions this week. According to Goldman Sachs strategist Michael Cahill, this week could be momentous for central banks.

The Fed is expected to raise rates, potentially marking the end of its cycle of rate hikes. The ECB is likely to signal the end of its own cycle of negative rates, which is considered a significant achievement. The Bank of Japan may surpass them both by finally beginning to reverse its ultra-loose monetary policy.

Each central bank faces different challenges. The Fed paused its rate hike cycle last month due to low inflation, but it remains committed to reaching its inflation target. The market expects a 25 basis point hike on Wednesday, which could potentially end the aggressive monetary tightening of the past 16 months.

Inflation surprises have also emerged in the euro zone, with consumer price inflation hitting its lowest point since January 2022. The ECB is expected to raise its interest rate by 25 basis points, but the focus will be on the future direction of policy rates. Traders will analyze the ECB’s communication for clues about tightening, neutrality, or a pause.

The Bank of Japan held its interest rate target at -0.1% in June, but speculation is growing about when it will begin reversing its policy. First-quarter growth was revised higher, and inflation has remained above the BOJ’s target for 15 months. However, the market is not pricing in any revisions to rates or the yield curve control policy.

Overall, this week’s central bank decisions could mark important milestones in their respective monetary policies.

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