GBP/JPY steadies as markets scale back BoE easing and delay BoJ hikes
- GBP/JPY consolidates within the weekly range above 210.00 on Friday.
- US-Iran conflict lifts Oil price, reviving global inflation concerns.
- Markets scale back BoE rate-cut bets while pushing back BoJ rate-hike expectations.
GBP/JPY trades little changed on Friday, consolidating within the week’s range as traders reassess the monetary policy outlook for major central banks. Rising Oil prices linked to the escalating US-Iran conflict are fueling inflation concerns, which could influence future interest-rate decisions.
At the time of writing, GBP/JPY trades around 210.70, set for a third weekly gain as wide interest rate differentials continue to support the British Pound (GBP) against the low-yielding Japanese Yen (JPY).
The US-Iran conflict continues to dominate market sentiment, with little sign of de-escalation. The escalating tensions are embedding a geopolitical risk premium in energy markets amid ongoing supply disruptions through the Strait of Hormuz, a key route for global Oil shipments.
Markets have scaled back expectations for near-term easing from the Bank of England (BoE) since the Middle East conflict escalated. Interest-rate futures now price roughly a 20-30% probability of a 25 basis-point (bps) rate cut in March, down from around 80% before the conflict. Markets also no longer fully price two rate cuts in 2026 and see less than a 50% chance of a single 25 bps cut by the end of the year.
Meanwhile, expectations for the Bank of Japan’s (BoJ) next rate hike have also been pushed back as policymakers assess the economic impact of higher Oil prices. Japan relies heavily on imported energy, meaning a sustained rise in energy costs could weigh on economic growth.
Traders now expect the Bank of Japan (BoJ) to hold interest rates steady at the upcoming March policy meeting, while the timing of the next rate hike remains uncertain.
Former top BoJ economist Seisaku Kameda said on Friday that if the conflict proves short-lived and tensions ease this month, the BoJ could still raise its policy rate to 1.0% from the current 0.75% as early as April, Reuters reported. However, if the war persists and market volatility remains elevated, the central bank may delay the next rate hike until around June or July, Kameda added.
Meanwhile, sustained weakness in the Japanese Yen continues to keep Japanese authorities on alert. Finance Minister Satsuki Katayama said on Friday that officials are closely watching the market and will “respond nimbly while closely communicating with overseas authorities.”
Katayama added that the Bank of Japan’s monetary policy “is aimed at achieving price stability, not at manipulating foreign exchange rates.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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