The Bank of Japan’s ultra dovish stance on negative interest rates will lead to continued rate differentials between the U.S. and Japan’s central bank, according to economists at Goldman Sachs. This week, the U.S. Federal Reserve, Bank of Japan, and European Central Bank are set to announce key interest rate decisions, potentially marking pivotal moments in their monetary policy trajectory. Goldman Sachs strategist Michael Cahill described this week as “momentous,” with the possibility of the Fed delivering its last rate hike, the ECB signaling the end of its cycle out of negative rates, and the BoJ finally making a move. Each central bank faces unique challenges. The Fed, which concludes its policy meeting on Wednesday, paused its string of interest rate hikes last month as U.S. consumer price inflation dropped to its lowest level in over two years. However, core inflation remains relatively high. The market expects a 25 basis point hike, but this could be the last as inflation and the labor market cool. The ECB has seen downside inflation surprises, but core inflation remains elevated. A 25 basis point hike is expected at the ECB meeting, and the focus will be on future rate hike guidance. The BoJ is still grappling with low inflation and sluggish growth, despite seeing higher growth and sustained inflation above its target. However, the market does not anticipate any revisions to rates or the central bank’s yield curve control policy in Friday’s announcement.
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