The Bank of Japan Meeting
The Bank of Japan on Thursday is expected to keep rates unchanged at 0.50% this week, with little urgency to tighten policy at the moment. Markets only see around a 10% chance. There had been increasing speculation a few months ago that the BoJ was edging closer to hiking interest rates, but policymakers now remain cautious amid global headwinds and Japan’s recent political changes. The latter political shifts following Prime Minister Takaichi’s leadership win have added uncertainty as she is known to be a monetary and fiscal dove and against central bank’s tightening policy. That said, there are not expected to alter monetary policy direction for now
Last month, the central bank surprised markets by announcing plans to gradually sell ETF and J-REIT holdings, while maintaining rates by a 7–2 vote, in what was seen as a hawkish move. While an eventual 25bps hike is possible early next year, the overall stance remains accommodative, with no further hikes likely before the middle to end of next year.
Markets will focus on the BoJ’s updated Outlook Report, with modest downside risks to GDP and inflation forecasts. Any hints about the timing of policy normalisation will be key — especially as Japan faces slower growth and pressure from a stronger dollar and higher global yields. USDJPY
will also need to contend with President Trump’s meeting this week with Takaichi, during his Asia trip. The White House would like the major lower to correct the US trade deficit with Japan, while Takaichi’s presumed policies are yen negative, with pressure on the Bank of Japan not to raise rates. Japanese policymakers will only likely intervene and sell dollars around the 155-160 area.
The ECB Meeting
Later on Thursday, the ECB is widely expected to hold its Deposit Rate at 2%, while also maintaining its data-dependent stance. September’s meeting reaffirmed this cautious approach, with 2026 inflation forecasts revised slightly lower to 1.7%, prompting a mildly dovish market reaction. President Lagarde later clarified that such small changes wouldn’t trigger immediate action, noting that economic risks are now “more balanced.”
Data has been close to expectations since the last meeting. The September PMIs rose as expected while October PMIs surprised on the upside due to a strong increase in the services sector. This data suggests a slightly better growth momentum than the ECB staff projections, which forecasted 0.0% q/q GDP growth in Q3 and 0.2% q/q in Q4. Inflation ticked up to 2.2% y/y in September due to base effects while the momentum of underlying inflation was similar to that in recent months. September inflation aligned with staff projections for Q3 in both core and headline.
This all means the ECB is likely to stay patient until December, when fresh economic staff projections could reopen the debate on rate cuts. A ‘meeting-by-meeting’ approach will probably be reiterated while attention will be paid to any new details on the ‘good place’ assessment that has previously been stated, and what could change it.
Going forward, we note there is growing divergence among members regarding the inflation outlook. This was evident in the minutes from the September meeting, where several members highlighted downside risks to inflation and expressed concerns regarding the euro’s strength and households’ persistently high savings rates. On the other hand, some members emphasised the potential inflationary effects of expansionary fiscal policies in the region and rising food inflation.
Markets currently see the first reduction coming early next year if growth remains subdued. For now, the ECB appears comfortable holding steady, preferring flexibility as it assesses inflation trends, growth softness, and broader market conditions before potentially shifting policy. The euro may remain fairly quiet, driven by US Fed factors and the overall risk mood.