Rate Hike
Bank of Japan hikes interest rate to 0.25% from 0-0.1%, trims bond-buying plan
This story was originally published at 12:00 IST on 31 July 2024
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NEW DELHI – In a move away from its long-running ultra-loose policy, the Bank of Japan today raised its benchmark interest rate to "around 0.25%" from its previous range of 0-0.1%.
"Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2%," the central bank said in a statement.
However, the bank said real interest rates are expected to remain "significantly negative" after the change in the policy interest rate, and accommodative financial conditions will continue to firmly support economic activity.
The central bank forecasts inflation — excluding prices of fresh food — to reach 2.5% by the end of 2024-25 (Apr-Mar), and 2.1% and 1.9% by the end of 2025-26 and 2026-27, respectively. Given the inflation forecast for 2024-25 is at 2.5%, the real interest rate will come to (-) 2.25%.
The central bank also outlined its plan to reduce the purchase amount of its bond-buying programme. The bank decided to reduce the amount of its monthly outright purchases of Japanese government bonds to about 3 trln yen per month in Jan-Mar 2026.
In principle, the bank will reduce the planned amount of its monthly outright purchases of Japanese government bonds by about 400 bln yen each calendar quarter.
"In principle, long-term interest rates are to be formed in financial markets, and it is appropriate for the Bank to reduce its purchase amount of Japanese government bonds in a predictable manner, while allowing enough flexibility to support stability in the JGB (Japanese government bond) markets," it said.
The central bank will conduct an interim assessment of the reduction of its purchase amount of government bonds at the June 2025 policy meeting. In case of a rapid rise in long-term interest rates, the bank will make nimble responses by, for example, increasing the amount of government bond purchases and conducting fixed-rate purchase operations of government bonds, according to the statement.
"The bank is prepared to amend the plan for the reduction of its purchase of JGBs at the MPMs (monetary policy meeting), if deemed necessary," it said.
The Bank of Japan estimates that the country's real GDP growth will be 0.6% by the end of 2024-25, and 1.0% by the end of both 2025-26 and 2026-27. If the economic outlook by the bank is realised, it will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation, it said.
The yen jumped to an over three-month high of 151.58 per dollar immediately after the policy outcome, but later reversed its gains. End
Reported by Pratiksha
Edited by Avishek Dutta
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