The Bank of Japan rate rise to a 31-year high rattled currency markets on Friday, even as oil prices extended a three-day slide on easing fears over Saudi Arabian supply disruptions. Brent crude fell more than one per cent to $103.34 overnight, putting it on course for its first weekly loss in three weeks.
Bank of Japan rate rise fails to steady the yen
The Bank of Japan raised its policy rate to 1.25% from 1% in a 7-2 vote, according to Yahoo Finance, making it the latest central bank to push borrowing costs higher in response to inflationary pressure driven in part by the recent spike in oil prices. The decision was widely expected, but it did nothing to support the yen, which slumped after investors focused on the two dissenting votes on the rate-setting committee.
Those dissenters were board members Toichiro Asada and Ayano Sato, who argued for patience rather than a further tightening of monetary policy. Their reservations appeared to carry more weight in currency markets than the majority decision itself, with traders reading the split as a signal that the Bank may not move as aggressively as some had anticipated.
The Bank signalled it was prepared to keep pushing rates higher to bring inflation under control, but the yen’s reaction underlined a familiar difficulty for policymakers: announcing a tightening cycle while two of your own committee members are urging restraint tends to undercut the message.
Oil market calms after Saudi pipeline attack
The drop in oil prices reflected a shift in market sentiment around the risk to Saudi Arabian supply. Fears had been running high after Yemen’s Iran-backed Houthi group struck Saudi oil facilities earlier in the week, forcing Riyadh to cancel some deliveries to Europe after its East-West pipeline was damaged. Prices had climbed to close to four-month highs on the back of those strikes.
The two sides exchanged fresh strikes across their border on Thursday, but markets largely shrugged off the renewed hostilities, concluding that a wholesale disruption to output from the world’s second biggest oil producer remained unlikely. Brent’s slide beyond one per cent to $103.34 reflected that reassessment.
Rising oil costs have been a persistent driver of inflationary pressure globally in recent months, which is precisely why the Bank of Japan’s decision landed in a broader context of central banks being pulled toward tighter policy even where domestic conditions might otherwise counsel caution.
Bank of England move also weighing on markets
The day’s rate decisions were not limited to Tokyo. The Bank of England held interest rates the previous day and also paused its bond-selling programme, a move that pushed UK government borrowing costs lower after a period of elevated yields. That decision was received as something of a surprise by investors, who had been braced for a more hawkish posture following recent weeks of upward pressure on gilts.
The Bank of England’s pause added a counterpoint to the Bank of Japan’s tightening: two major central banks, both facing inflation shaped in part by the same energy market pressures, arriving at different decisions within 24 hours of each other.
Equity markets were set to stay broadly steady against this backdrop, with the FTSE 100 not anticipated to move sharply in either direction as traders weighed the competing signals from Tokyo, London and Riyadh.
Elsewhere in the day’s business news, HSBC faced a reported £17 million exposure from the collapse of Brewdog, while a month-old DeepMind spinout was reported to be approaching a $4 billion valuation on what was described as a bet on future capability. The Bank of Japan’s next scheduled policy meeting will be watched closely to see whether the 7-2 split narrows or widens.
