Bank of Japan hikes interest rate to 1.25%

The Bank of Japan raised its policy interest rate from 1% to 1.25% per year on 18 September, in a 7 to 2 vote. The widely anticipated 25-basis-point hike was viewed by markets as insufficient to support the Japanese currency, leading the yen to weaken against the US dollar.

Around 16:50 Brasília time, the dollar traded higher at 156.75 yen. Meanwhile, the euro rose to $1.1488 and the British pound climbed to $1.3396. The DXY index, which tracks the dollar against a basket of six major currencies, slipped 0.02% to 100.222 points, while posting a 1.1% gain over the week.

Bank of Japan Governor Kazuo Ueda stated that underlying inflation risks exceeding the 2% target. He noted that the central bank will raise interest rates again depending on developments in the economy, prices, and financial conditions.

Ipek Ozkardeskaya, senior analyst at Swissquote, noted that the rate hike failed to convince the market that the central bank can bring rates near a neutral level. Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, stated that only the Bank of Japan, rather than currency interventions, can support the yen.

Elsewhere in currency markets, the offshore Chinese yuan crossed the 6.70 per dollar threshold to touch its strongest level since July 2022, marking its best performance in more than four years on strong exports and central bank backing.