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A thrilling week for central banks draws to a close - Bank of Japan pauses while Wall Street celebrates the Fed's interest rate hike with a delay

While equity markets finally turned the Federal Reserve's interest rate turnaround in the US into strong gains, Japan's central bank left its key interest rate unchanged at its highest level since 2008 today. China's central bank also kept its key rates stable. In Europe, both the Bank of England and Norway's central bank left their key interest rates unchanged yesterday. 

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Alessandro Fezzi, LGT Research Content & Publications
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5 minutes

Bank of Japan
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The Bank of Japan (BoJ) kept its key interest rate stable at "around 0.25%" on Friday at the end of its two-day meeting, the highest level since 2008. This was largely expected in capital markets. However, a further interest rate hike is expected in Japan by the end of the year. The BoJ continues to expect Japan's economy to continue to recover moderately and inflation to continue to rise. Meanwhile, Japan's consumer price index rose 2.8% year-on-year in August (previous month 2.7%), in line with expectations. Core inflation was 2%, compared with 1.9% the previous month. Following the BoJ's decision, the yen gained around 0.3% against the US dollar to 142.20.

China's central bank also keeps rates unchanged - Asian stock markets follow the positive lead of Wall Street 

The People's Bank of China also kept its key interest rates stable, with the benchmark one-year lending rate - which affects corporate and most household loans - at 3.35% and the benchmark five-year lending rate - a reference for mortgage rates - at 3.85%. Most stock markets in the Asia-Pacific region trended higher on Friday, with the Nikkei 225 in Tokyo leading the gains with a daily gain of almost 1.9%, driven by the rally on Wall Street. The broad Topix rose 1.5%. In Hong Kong, the Hang Seng Index gained almost 1.5%, while the blue-chip CSI 300 index in mainland China fell by 0.3%. The South Korean blue-chip Kospi index rose by 0.9% and the small-cap Kosdaq index increased 1.3%. The Australian S&P/ASX 200 traded 0.3% higher before the weekend.

Late fireworks on US stock markets

In New York, equity markets reacted with a time lag to the Fed's interest rate reversal the previous day. The Dow Jones Industrial recorded record values for the fourth consecutive trading day and closed yesterday at 42,025.19 points, almost 1.3% higher. The S&P 500 closed 1.7% higher at 5713.64 points. On the Nasdaq, technology stocks benefited from the Fed's "jumbo cut" and the indices gained around 2.5%. On bond markets, the yield on ten-year US government bonds climbed further to 3.72%. Meanwhile, initial jobless claims fell by 12,000 to 219,000 last week, more than expected (consensus 230,000). The Philadelphia Federal Reserve's industrial index improved to plus 1.7 points in September from minus 7.0 in July. Economists had only expected an increase to minus 1.1 points. The Philly Fed index covers the industry in the key region in the northeast and is considered one of the most important leading indicators for US production.

The significant interest rate cut in the US on Thursday also led to gains on Europe's stock markets. The Euro Stoxx 50 extended its gains after a friendly start and closed 2.2% higher at 4943.38 points. Outside the eurozone, the daily gains were somewhat more modest. The Swiss SMI managed a plus of around 0.6%.

Bank of England pauses its cycle of interest rate cuts as expected

The Bank of England left the key interest rate at 5.0%, thus confirming market expectations. The British central bank had eased interest rates for the first time at the beginning of August. The Monetary Policy Committee currently sees mixed economic data. The headline inflation rate remained consistently close to the central bank's target of 2%, but prices for services - which account for around 80% of the British economy - rose by 5.6% in August compared to the same period last year. Wage growth in the UK cooled to a more than two-year low in the three months to July but remained high at just over 5%. The decision was taken by a majority of eight votes to one, with only one in favour of a further easing by 25 basis points.

Norway's central bank also leaves interest rates unchanged

The Norwegian central bank left its key interest rate unchanged at 4.5 per cent and expects interest rates to remain at a high level in the coming months. Here, too, markets had expected the decision. In its outlook, however, Norges Bank also emphasised that the time for an easing of monetary policy is approaching. In Norway, too, inflation has recently weakened, and the rate of price increases fell to 2.6% in August. However, core inflation has so far remained stubbornly high, it said.

Corporate and economic calendar

Corporate news in focus: No relevant company results are due today.

Economic data in focus: Producer prices in Germany, retail sales in the UK, business confidence in France, consumer confidence in the eurozone and ECB President Lagarde speaks.
 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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