Following BoJ’s dovish hold, British Pound trades nearly unchanged against Japanese Yen

• The British Pound shows little movement against the Japanese Yen following the BoJ’s policy announcement.
• An 8-1 majority backs the BoJ’s decision to hold interest rates at 1.25%.
• A BoE interest rate increase to 4% next week is expected by investors.

Trading around 210.80 against the Japanese Yen (JPY), the British Pound (GBP) is largely unchanged following the Bank of Japan’s (BoJ) monetary policy decision.

An 8-1 vote saw the BoJ retain interest rates at 1.25%. Dissenting board member Hajime Takata favoured a 25 basis points (bps) increase to 1.50%.

At its September meeting, the BoJ had raised policy rates by 25 bps.

Expectations that the BoJ would keep policy rates on hold followed Governor Kazuo Ueda’s warning against rapid monetary tightening at the September policy meeting.

In a note, Brown Brothers Harriman (BBH) analysts described the BoJ as "widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again." Citing Governor Kazuo Ueda’s cautious stance, they noted that "in September, BoJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched."

For further indications of the monetary policy outlook, investors are awaiting BoJ Governor Ueda’s press conference. Ahead of the policy announcement, Commerzbank noted that “markets currently price an around 80% probability of a rate hike in December”.

Attention in United Kingdom (UK) financial markets is now turning to next week’s monetary policy announcement from the Bank of England (BoE).

Will the BoE Raise Interest Rates Next Week?

Citing a “brace of upside surprises for CPI and PPI output price inflation, and firmer wage data” as the main drivers, Societe Generale strategists described a BoE rate hike as effectively “nailed on in November,”. In their assessment, these developments will “alert the MPC to the budding risk of second round effects” and “will almost certainly trigger a hawkish response on interest rates” at the next policy meeting on 5 November.