The US central bank, Bank of Japan and European central bank all will announce key interest rate decisions this week, each potentially approaching a key moment in their monetary policy trajectory.

As Goldman Sachs strategist Michael Cahill said in an email on Sunday, “This should be a significant week.”

“The Fed is expected to deliver what could be the last hike in a cycle that has been one of the books so far. The ECB is likely to signal that it is nearing the end of its own cycle of negative rates, which is a big ‘mission accomplished’ in itself,” said G10 FX strategist Cahill.

“But as it nears the end, the BoJ could outdo them all by finally getting off the starting blocks.”

Fed

Each central bank faces a very different challenge. The Fed, which will conclude its monetary policy meeting on Wednesday, last month suspended 10 consecutive interest rate hikes June consumer price growth in the state fell to the lowest annual rate in more than two years.

But base rate CPIwhich strips out volatile food and energy prices, was still up 4.8% year-on-year and 0.2% month-on-month.

Policymakers reiterated their commitment to reduce inflation to the central bank’s 2% target, and the latest data stream reinforced the impression that the US economy is proving resilient.

The market is all but certain that the Federal Open Market Committee will decide on Wednesday to hike by 25 basis points, bringing the Fed funds target rate between 5.25% and 5.5%. CME Group FedWatch tool.

With inflation and the labor market now steadily cooling, Wednesday’s expected hike could mark the end of a 16-month cycle of near-constant monetary policy tightening.

“The Fed has signaled its willingness to raise rates again if needed, but the July rate hike could be the last — as markets currently expect — if labor market and inflation data for July and August provide further evidence that wage and inflation pressures have now receded to levels consistent with the Fed’s target,” economists at Moody’s Investors Service said in a survey last week.

“However, the FOMC will maintain a tight monetary policy to aid continued softening of demand and, consequently, inflation.”

That was echoed by Steve Englander, head of global G10 FX research and macro strategy for North America at Standard Chartered, who said the debate going forward will be around the guidance the Fed issues. Several analysts have suggested over the past week that policymakers will remain “data dependent” but push back against any talk of interest rate cuts in the near term.

“There is a good case that September should be skipped unless there is a significant inflation surprise, but the FOMC may be wary of giving even slightly dovish guidance,” Englander said.

“In our view, the FOMC is like a meteorologist who sees a 30% chance of rain, but biases the forecast toward rain because the fallout from an incorrect sunny forecast is seen as greater than from an incorrect rain forecast.”

ECB

Inflation-slowing surprises have also appeared in the eurozone recently June consumer price growth in the entire bloc reached 5.5%which is the lowest point since January 2022. Still, core inflation remained stubbornly high at 5.4%, a modest month-on-month increase, and both still well above the central bank’s 2% target.

The The ECB raised its key interest rate by 25 basis points to 3.5% in June, deviating from the Fed’s pause and continuing a string of hikes that began in July 2022.

With more than a 99% chance of another 25 basis point hike at the conclusion of the ECB’s policy meeting on Thursday, the market and key central bank numbers echo transatlantic counterparts and maintain a hawkish tone, according to data from Refinitiv.

ECB chief economist Philip Lane last month warned markets against interest rate cuts over the next two years.

With a quarter-percentage-point hike almost a foregone conclusion, as with the Fed, Thursday’s ECB announcement will focus on what the Governing Council indicates about the future development of key rates, BNP Paribas chief European economist Paul Hollingsworth said.

“Unlike in June, when President Christine Lagarde said ‘it is very likely that we will continue to raise rates in July,’ we do not expect her to pre-commit the Council to another hike at the September meeting,” Hollingsworth said in a note last week.

“After all, recent comments suggest no strong conviction even among hawks for a September hike, let alone a broad consensus signaling its likelihood as early as this month.”

Given this lack of explicit direction, Hollingsworth said traders will read between the lines of the ECB’s message to try to create a bias towards tightening, neutrality or a pause.

At its last meeting, the Governing Council said that its “future decisions will ensure that the ECB’s key interest rates are adjusted to sufficiently restrictive levels to achieve a timely return of inflation to the 2% medium-term objective and will be maintained at these levels for as long as necessary.”

BNP Paribas expects this to remain unchanged, which Hollingsworth said represents an “implicit bias for further tightening” with “room to wiggle” if incoming inflation data disappoints.

“However, the message at the press conference could be more subtle, but it suggests that more could be needed rather than that more is needed,” he added.

“Lagarde could also choose to narrow the focus on September by hinting at a possible Fed-style ‘skip’, leaving open the possibility of hikes at subsequent meetings.”

Bank of Japan

Far from the discussion in the West about the last monetary policy tightening, the question in Japan is when its central bank will become the last to tighten monetary policy.

The Bank of Japan kept its short-term interest rate target at -0.1% in June, taking negative rates for the first time in 2016 in hopes of stimulating the world’s third-largest economy from a long-term “stagflation” characterized by low inflation and slow growth. Policymakers also left the central bank’s yield curve (YCC) policy unchanged.

Still, Japan’s first-quarter growth was revised sharply higher to 2.7% last month, while inflation was it has remained above the BOJ’s 2% target for 15 consecutive months, which increased by 3.3% year-on-year in June. That fueled some early speculation that the BOJ may be forced to finally start reversing its ultra-loose monetary policy, but the market is still not pricing in any rate revisions or the YCC in Friday’s announcement.

Yield curve steering is usually a temporary measure in which a central bank targets a longer-term interest rate and then buys or sells government bonds at the level necessary to achieve that rate.

Under Japan’s YCC policy, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero, with the aim of maintaining the inflation target at 2%.

Barclays noted on Friday that Japan’s output gap – the difference between actual and potential economic output – was still negative in the first quarter, while real wage growth remains negative and the inflation outlook is uncertain. Bank of England economists expect a move away from the YCC at the central bank’s October meeting, but said the split vote this week could be important.

“We believe the Policy Council will reach a majority decision, with the vote split between relatively hawkish members emphasizing the need for YCC revision (Tamura, Takata) and more neutral members, including Governor Ueda, and dovish members (Adachi, Noguchi) in the reflationist camp,” said Barclays head of economic research Christian Keller.

“We believe this move away from the unanimous decision to maintain the YCC could support market expectations for future policy revisions. In this context, the post-MPM press conference in July and the summary of views released on 7 August will be particularly important.”