Fed, Bank of England & Bank of Japan - 6 key questions for the week ahead

Another febrile week for bond markets sets up a key week ahead for central banks as the Federal Reserve, Bank of England and Bank of Japan all face important rate decisions in the coming days. Ahead of the BoE meeting there are important labour market and inflation reports for the UK, which come after a surprisingly solid GDP report.

Here’s the key things to watch over the next week.

Will the Fed hike rates?

The central question facing financial markets is whether the Federal Reserve raises rates on Wednesday when it wraps up its September Federal Open Market Committee meeting. Friday's CPI inflation report nudged markets towards pricing in a hike as core inflation was enough to persuade the Fed to raise. Market implied odds for a rate hike rose to about 90% from under 70% before the print, implying it's a done deal, however the Fed, under chair Kevin Warsh, has not indicated expressly what it will take for it to hike, which leaves room for uncertainty. Not raising rates now, given the bond market rout of the last two weeks, would raise a lot of questions. I had a look at this here.

Will Gulf nations agree to reopen the Strait of Hormuz?

Following a sharp rally, crude price reversed on Friday on reports Iran and Gulf states will meet on Monday in a push to reopen the Strait of Hormuz. Oman wants its allies in the six-nation Gulf Cooperation Council to meet Iranian counterparts in a bid to temporarily reopen the Strait, underlining the sense of urgency among oil producers. Oman and Iran said two weeks ago they were close to doing a deal to manage traffic through the disputed waterway. However, it's felt that any durable arrangement will require the US and Iran to agree, which remains highly uncertain. Ole has more here.

Has the UK labour market turned a corner?

UK labour market data next week will be closely watched after months of cooling conditions, with rising unemployment, falling vacancies and weaker wage growth reducing pressure on the Bank of England to raise rates. However, recent business surveys point to a tentative improvement in hiring activity, while stronger-than-expected GDP and productivity figures suggest the economy may be holding up better than labour market data alone implies. For the BoE, the key question is whether employment conditions are stabilising without reigniting wage inflation. The labour market report last month showed wage growth cooled to 2.8%, the lowest since October 2020. 

Is UK inflation getting worse?

The latest inflation figures will help determine whether recent price pressures are proving temporary or becoming more entrenched. Headline CPI has risen on higher energy costs, but underlying measures have remained relatively contained, with services inflation easing and food inflation still subdued. While risks from higher energy prices, supply disruptions and rising food costs remain, inflation is still expected to peak well below levels that would force the Bank of England back into rate hikes, allowing policymakers to remain patient for now. Last month's CPI data showed the headline inflation rate rising from 2.6% to 2.9%, largely due to a 13% increase in the energy price cap.

How long is the Bank of England prepared wait?

The Bank of England appears set to keep interest rates unchanged as it assesses whether higher energy prices feed through into broader inflation. With wage growth having cooled sharply and the labour market softening, policymakers have seen little evidence of the kind of second-round inflation effects that emerged after the pandemic. Attention will therefore focus less on rates themselves and more on the Bank's guidance for future easing, as well as any changes to its quantitative tightening programme and gilt sales.

The Bank of England is likely to keep rates on hold at 3.75% with another 6-3 vote. I will be looking for language around the persistence of energy-based inflation and whether Governor Andrew Bailey pushes back against market pricing for four hikes through to next year. My belief is that Bailey will push against the hawkish pricing in the markets but if energy prices stay higher for longer then the November meeting does start to come into view.

Does the Bank of Japan go big?

The Bank of Japan rounds out the triumvirate of central bank action and is likely to raise rates by 25bps. There is a chance it goes big with a 50bps move higher, however, as part of a potential coordinated effort with the US. There have already been significant moves in bond markets and the BoJ may send a hawkish message that backs them up and keeps the yen supported. The market is begging for a rate hike to follow in December so the risk to JPY is that the BoJ falls short of this expectation. Also market participants will want to hear about asset allocation shifts favouring domestic bonds by Japan's $2tn government pension fund. More on the JPY here in Friday's podcast with John.