UBS still looks for BOJ hike in Ocotber

Investing.com - The Bank of Japan surprised many by delaying the start of its bond buying, so-called quantitative tightening, at its policy meeting earlier Friday, but UBS still looks for an interest rate hike in October.

At its two-day policy meeting, the central bank said it would continue to buy government bonds at the current pace. But it decided to come up with a specific plan to trim purchases for the next one to two years, at a subsequent policy-setting meeting in July.

The BOJ will hold three meetings for the commercial banks' group, securities firms' group, and buy-side group, respectively, with the dates to be announced. 

“We think this approach of gathering the views of bond market participants ahead of a formal decision suggests three things,” said analysts at UBS, in a note Friday.

“First, the Bank wanting to avoid disruption in the bond market with an attentive attitude that offers foreseeability. Second, the Bank not being in a hurry to reduce the large holding despite some criticism of holding such a large amount. Third, the Bank not having a clear view on how far the yield would move with the QT. In any event, we think the risk of an undesired spike in the yield has been reduced by this approach,” UBS said.

BOJ Governor Ueda also made it clear, in the subsequent press conference, that the amount of bond purchase reduction would be fairly large. 

“While he did not mention the amount, we sensed that he wanted to emphasise this point to confirm that serious QT is coming soon,” UBS added.

The Swiss bank still expects a policy rate hike at the end of October from the current 0%-0.1% to 0.25%, after confirming a pickup in real consumption and service price inflation in hard data.

At the end of 2024, our current call looks for 0.25%, UBS added, with three 25 bps rate hikes likely in 2025 (April, July, and October), ending the year at 1.0%.

“We now tentatively predict that the terminal rate is 1.5%, reached in 2026 with the most with the most important assumption being that Japanese economy will succeed in the Nominal Renaissance and attain a normal economy with 1% real GDP growth, 2% CPI inflation, and 3% nominal GDP and wage growth,” the Swiss bank concluded.