The US Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BoJ) are the three central banks that will announce their interest rate decisions this week. Market participants and analysts will also be focusing on the post-meeting statements to search for forward guidance clues.

The International Monetary Fund (IMF) warned Japan via its World Economic Outlook report that “right now, the risk is probably on the upside, that maybe inflation pressures will continue to remain above the target.” The IMF suggested that “monetary policy can remain accommodative, but it needs to prepare itself for the need to maybe start hiking,” and advised the BoJ to "be a bit more flexible and maybe move away from the yield-curve control that it has now.”

In Australia, inflation fell to 6% in the second quarter of the year, on an annualised basis, surpassing analysts’ expectations. On a quarterly basis, prices rose by 0.8%, the lowest level recorded since September 2021.  Analysts at Deloitte Access suggested that the latest inflation figures were further evidence that the Reserve Bank of Australia has increased interest rates too far.
 

Fed Interest Rate Decision

The Federal Open Market Committee (FOMC) of the Federal Reserve is expected to convene on Wednesday and reveal its decision on interest rates later in the day. Market analysts suggest that the US central bank will move forward with a 25 basis points rate hike as revealed by a Reuters report.

While the possibility of two rate hikes by year's end has been discussed, most economists still believe that the upcoming increase would be the last in the current tightening cycle. Headline inflation has dropped in the last few months, coming in at 3.0% in June, a bit above the Fed’s target figure. Dropping inflation and a resilient strong labor market have prompted some economists to suggest that the Fed could start cutting rates before the end of 2023. However, the Fed’s Head Jerome Powell keeps stressing that monetary policy tightening is not over yet.
 

ECB Interest Rate Decision

The ECB will be the next central bank that will reveal its interest rate plans on Thursday afternoon. The ECB has followed other central banks by raising borrowing costs, trying to combat elevated inflation figures. According to a Reuters report, economists suggest that the eurozone’s central bank will move forward with a 25bps hike.

Interest rates in the euro bloc have risen 400 basis points in the last year to 3.5%, the highest level recorded in 22 years. While headline inflation fell for a third straight month in June, core prices, such as those for services, have risen. Analysts at UBS suggest that “underlying inflation will be very, very slow to come down so this is a worry for the ECB,” due to the strong labor market and wage rises in the past few months.
 

BoJ Interest Rate Decision

The BoJ will be the last central bank to have its board meeting on interest rates. Economists suggest that the BoJ will keep the Yield Curve Control (YCC) unchanged and its short-term interest rate target steady at -0.1%. Inflation has been consistently above the BoJ’s target in the last 15 months while other surveys show that the economy is heating up.

Rabobank’s analysts wrote in a report published on July 25th that a “dovish” approach by the central bank of Japan could weigh down on the Japanese yen. The Dutch bank’s economists suggested that “while the JPY would likely soften on a dovish policy outcome on July 28, it is very possible that speculation of a move in September could build quite rapidly. This would limit selling pressure on the JPY. Signs of sustained wage inflation would be the green light for a policy adjustment by the BoJ while smaller wage rises into next year would likely signal the opposite.”

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