On Wednesday morning, the Bank of Japan (BoJ) delivered a hawkish surprise. In addition to the actual rate hike, it was even made clear that further rate hikes could follow if the BoJ's new forecasts materialise. Most economists were probably surprised as well, with the majority expecting a later hike, Commerzbank’s FX analyst Michael Pfister notes

BoJ expects a slightly lower inflation rate this year

“The BoJ now expects a slightly lower inflation rate this year (2.5% instead of 2.8% y/y), but the forecast for next year has been revised slightly upwards (to 2.1% instead of 1.9% y/y). For the core rate, officials continue to expect a rate of 1.9% this year and next, and, somewhat surprisingly, the rate is even expected to rise again in 2026.”

“The officials are assuming that inflationary pressure on the core rate will pick up in the coming months. In order to achieve this forecast, rates would have to be roughly in line with the inflation target for the next 9 months. This is not impossible; other central banks have made more unrealistic forecasts in the past. However, it would be well above the average of the 2010s, a lot would have to go right for this to happen.”

“Although the BoJ expects slightly weaker growth this fiscal year, this will not affect growth next fiscal year. Nevertheless, the forecast seems rather optimistic, especially considering that the forecasts for 2025 and 2026 are above the average of the 2010s. One gets the impression that the BoJ does not expect its more hawkish stance to have any impact. Neither on inflation nor on growth.”