RPT- MNI INTERVIEW: Ex-BOJ Sakurai Sees Dec Hike, 2% Terminal

(Repeats article first published on Sept 29)
The Bank of Japan will probably wait until December before it raises its policy interest rate to 1.5% from 1.25%, but two further hikes are likely next year before it pauses to take stock of the economy and to weigh potential political resistance and possible financial system strains, former BOJ board member Makoto Sakurai told MNI.

“December is the main scenario. After December it will hike in March and June 2027. The BOJ’s policy stance has shifted to fight stronger price upside risk and to anchor underlying CPI inflation at around 2%,” Sakurai said, though he added “The October Outlook Report is very crucial. A higher inflation view will provide justification for the BOJ to raise the rate in October.”

The Bank will be conscious however that a back-to-back hike in October coming after September’s rate increase would risk being interpreted over-hawkishly by the market, which might consider that officials are worried that they fallen behind the curve in containing inflation, the former board member said.

Sakurai expects headline consumer price inflation to rise above 3% at the end of this year or at the end of the fiscal year in March, on the back of higher import prices for crude oil and corporate price pass-through. Crude import prices have jumped about 80% from a year earlier as Japan has been forced to source from different suppliers, Sakurai noted, referring to government data.

AI-related demand and exports have also been stronger than expected, so the jump in inflation will be fed by both cost and demand factors, he said. (See MNI BOJ WATCH: Ueda Signals More Hikes, But Timing Unclear)

POLITICS

The BOJ is willing to to raise the policy rate at least 2%, after which it will take stock of the impact of its tightening on the economy and inflation before deciding on any additional moves, Sakurai said. Prime Minister Sanae Takaichi is unlikely to want the rate to go any higher, though U.S. pressure for a weaker yen may make it difficult for her to oppose further hikes, he said.

The public’s reaction to monetary tightening could also be negative, while higher rates could put strain on parts of Japan’s financial system, particularly to smaller financial firms which have made big loans to real estate companies.

“One possibility is that there won’t be much of a public backlash to the rate at 2%, despite the impact of higher borrowing costs,” Sakurai said.

The yen may strengthen from its current 157 to the dollar, but not beyond about 140, despite FX intervention and the open U.S. pressure to force appreciation, Sakurai said, noting that the currency is under pressure from fiscal expansion, including a consumption tax cut, as well as from a Federal Reserve under Chairman Kevin Warsh which is now more hawkish than the BOJ under Governor Kazuo Ueda.

YEN

Takaichi’s economic policy has also been assisted from an inflationary boost to tax revenues as well as by a weak yen, Sakurai noted.

Finance Minister Satsuki Katayama said on Friday that U.S. President Donald Trump had expressed concern about yen weakness to Takaichi during talks in New York last week.

U.S. pressure may make it more difficult for the prime minister to go ahead with her desire to appoint reflationists to BOJ board positions which will become vacant in July 2027, when two hawkish members are due to step down, Sakurai said. At least one member will be nominated from a mega commercial bank, in order to replace Naoki Tamura, a former Sumitomo Mitsui Banking Corp. executive, he noted.

Whilst historical precedent might suggest that Tamura’s replacement would be likely to come from Mizuo Bank Ltd, people familiar with the matter told MNI that the appointment instead is likely to come from MUFG Bank, Ltd.

MNI: UK Triple Lock Move Would Save GBP22.5BN A Year By 2040

UK Prime Minister Andy Burnham's pension reform could save GBP22.5 billion a year by 2040, and make the path of spending less uncertain, the Centre for British Progress think tank estimates, although an Institute for Fiscal Studies economist doubts this will fund Burnham's proposed National Care Service within the medium term.

The savings estimate carries an 80% confidence interval of GBP8.9 billion to GBP37.2 billion, according to the CBP, a non-partisan think tank focussed on boosting economic growth.

"The reform means that the path of the state pension is less uncertain than under the triple lock," Matthew Stubbs, an economist at the CBP, told MNI. Still, "the eventual saving is highly dependent on how uncertain the macroeconomy is.”

Under the so-called pensions triple lock in place since 2011, state pensions have risen each year by the highest of earnings growth, inflation or 2.5%. In a speech at the governing Labour Party conference on Tuesday, Burnham said earnings growth would be replaced by whatever uplift is needed to keep the benefit at the level relative to average earnings it had when introduced.

"Forecasts by the Office for Budget Responsibility have shown that total government spending on the state pension could be as high as 9.1% of GDP in 2071-72 if the macroeconomy is as volatile as the previous 15 years or as low as 6.3% if using the preceding 17 years," Stubbs said, noting that CBP's simulations are based on inflation over the past 30 years.

The CBP published a dashboard comparing alternatives to the triple lock on Tuesday. (See MNI INTERVIEW: UK Spending Plans Lack Credibility-Ex BOE Deputy)

Keeping the triple lock in place until 2030 "does reduce savings from the policy in the medium term," Stubbs said. "Approximately, we expect the annual saving in 2034 to be around half as much for the policy announced today."

NATIONAL CARE SERVICE

Institute for Fiscal Studies Senior Research Economist Heidi Karjalainen told MNI that if the new model had been in place since 2011, the state pension would have increased by GBP9 billion less than the GBP16 billion a year actually incurred.

But Karjalainen doubted that in future this saving would be sufficient to fund a new National Care Service also announced by Burnham over the medium term.

"In the short run, [or the] medium run, the savings from this will be relatively small compared to what the universal social care system would cost," she said in an interview, adding that the old system risked an unsustainable "ratchet," where a one-off rise in inflation was counted twice for both earnings growth and subsequent inflation. 

The next budget will be presented on Oct 28, and a general election held by August 2029.

MNI: Rome Hopes No Further Energy Measures Until 2027 -Sources

Italian Prime Minister Giorgia Meloni is resisting pressure from some of her government ministers to extend measures to keep power and fuel prices down which have already cost EUR2.7 billion so far, exhausting all available fiscal margin, government sources told MNI.

The executive has spent the past few days closing deals with energy producers to cap diesel and gasoline prices at little immediate cost to the government, which should still allow it to close 2026 with a deficit of under 3% of GDP, keeping Italy from falling back into an excessive deficit procedure under EU rules, the sources said.

Meloni and Finance Minister Giancarlo Giorgetti have decided that this all the additional action possible if the country is to benefit from around EUR12 billion in additional fiscal room after activating the EU’s national escape clause for 2027, after having left the excessive deficit procedure in March, the sources said.

Still, some ministers are pressing for an extension of some of measures including cuts in excise duty beyond Oct 6. They argue that while this would push 2026’s deficit over 3% of GDP, the European Union could be persuaded to allow Italy to use margin under the national escape clause early. Otherwise, they say, the government could face a general strike even as it prepares for next year’s general elections.

NO LEEWAY

European Commission rules state that spending under the national escape clause is allowed on top of the permitted 3% deficit, so long as the country is not subject to the excessive deficit procedure. (See MNI: Spain's EU Bond Plan Runs Into Resistance - EU Sources)

Meloni and Giorgetti considered asking Brussels for leeway but decided the chances of success were low and that it was best to do whatever possible to contain this year’s deficit to the 3% limit, the sources said.

“The idea is to pass the budget for 2027 and then approve additional spending once there is confirmation of leaving the EDP in March”, one of the sources said, adding that companies which do the government a favour by capping energy prices now could then be compensated.

The government is expected to publish the macroeconomic framework that for the budget on Friday, confirming the deficits for both 2026 and 2027 to be below 3% of GDP. Government officials have also publicly signal that 2026 economic growth will be around 1%. For 2027, growth might be seen at 0.6% or 0.7%, sources told MNI.

MNI POLICY: BOE's Focus On Energy Supply As It Swings To Hikes

Bank of England policymakers are increasingly concerned about the risks of physical energy shortages, of natural gas in the winter and also diesel, as they gravitate towards a hike in November in what would be likely to be the start of a tightening cycle.

Monetary Policy Committee members who were seen as dovish such as Swati Dhingra, have acknowledged that tightening may be needed, while the divide between the three who backed a hike in September and the six who did not seems to be largely a question of timing.

"We need to learn about to what extent are these self-sustaining inflation dynamics going to persist and sustain themselves," Dhingra said at the London Macro Policy Forum last week, adding that that what matters is the duration and magnitude of the energy shock "because that's fundamentally what's driving this." (See MNI INTERVIEW: Oil Shock Means Europe Needs Higher Rates)

The BOE has been criticised for taking oil and gas energy futures curves as a given in its economic forecasts, and these will remain embedded in the Bank’s workhorse major macro model, but policymakers are now having to learn about the physical realities of energy markets and are deploying side models to capture them. 

The divergence between physical and futures crude prices has typically been narrow absent shocks, but it is now around USD18-20 per barrel. Prices refineries are paying are typically far above what futures curves show, while the futures curves themselves have been grinding higher.

DIESEL

Physical shortages and higher refining prices raise the spectre that the inflationary effects of the Middle East conflict will be more drawn out.

Diesel prices have already hit record highs, hit by a rolling Russian export ban and refining shortages. A U.S. export ban has also been mooted, although it is unclear whether it will materialise and in what form. 

Diesel prices changes tend to feed through more quickly and directly to producer input prices, with a lagged impact on the consumer gauge, whereas petrol prices go directly into the consumer price basket.

Factory gate inflation data for August showed higher input and output prices, with crude oil input prices up 26.7% and the output cost of refined products soaring by 49.1%.

The outlook for winter gas storage shortages should be clearer by the time of the MPC's November meeting. UK storage levels are low, currently at 31% compared with 58% for Germany and 71% on average in Europe, which in turn is below a five-year seasonal average of 86.8%.

MPC members not previously inclined to back tightening also have to consider whether the Bank can afford to look through another burst of high price increases after a prolonged period of inflation target overshoots. 

"If you get two really large shocks, one on the back on the back of another, that is relatively problematic," Dhingra said. 

2021/22 SHOCK

Former MPC member Gertjan Vlieghe, who was perceived as dovish in his time on the committee until 2021, agreed, saying at the London Macro Policy Forum that there is something to the argument that "central banks have a kind of stock of inflation credibility." Each time they say an inflation shock is temporary and it lingers they eat into that stock, he added.

The OIS swap curve at face value implies over 100 basis points of tightening by mid-2027. 

Vlieghe made the point that the energy shock so far is around half of the one in 2021/22 following the Russian invasion of Ukraine, when the BOE and the European Central Bank hiked by 200 basis points in response.

This time around the Bank had gone into the crisis expecting to cut rates by 50 basis points, as Deputy Governor Dave Ramsden and others have stressed, leaving the back-of-the-envelope maths implying a potential 50bp of hikes still to come, assuming the Ukraine analogy holds.

BOE economists and policymakers have been assisted in their energy market education by constant contact with energy market participants. The current chief economist at energy giant BP, like his predecessor, was a former senior BOE official.

MNI POLICY: Norges Bank Tightening Comes On Expectation Fears

Norges Bank's upward rate path revisions, accompanying September’s 25-basis-point hike which took some analysts by surprise, reflected policymakers' concerns that the prolonged overshoot of their inflation target raised the risk that price expectations could become stuck at high levels.

The higher rate path came despite an apparent marked slowdown in wage growth, and economic growth broadly in line with expectations, an assistant director at the Norwegian central bank noted during a recent event at Bank of America’s London offices attended by MNI.

The Bank's models are based on Norges Bank's average policy responses, but Orjan Robstad said that policymakers want to respond more to underlying inflation pressure than by the average reaction function “to make sure that these expectations do not become stuck at higher levels.” 

If that happened, it would “be really, really hard to get inflation all the way back to target,” he said.

Firm-based surveys conducted by the Bank had found a clear relationship between expectations and inflation, he noted.

Having raised the policy rate from 4.25% to 4.50%, both analysts and market pricing now anticipate that Norges Bank is likely to leave it there for a prolonged period, though with the door ajar to a further hike. The Bank's own published rate path puts around a 40% chance on another hike. (See MNI NORGES WATCH: Hikes, 'Prepared' To Hike Further)

HIGHER RATE EXPECTATIONS

Rate expectations have risen across the board in advanced economies including Norway but those higher rates should be sustainable, according to Robstad.

"When it comes to the contractionary effects of the increase in the long rates, for at least most Norwegian households, this is not that big of an issue since they have floating-rate mortgages, typically," he said.

In June, Norges Bank raised its assessment of the neutral rate, R-star, to a range of 0.25% to 1.75% in real terms, or 2.25% to 3.75% in nominal terms, despite soft economic growth. In September it upped its market-rate-based neutral estimate, R-bar, to 3.2% from 3.0%.

"These assessments of R-bar ... or R-star is not really that important for the decision now, but ... it gets more and more important [along the forecast horizon]," Robstad said.

Norway’s output gap now appears less negative than Norges Bank had assumed, which reflects labour market developments at a time when economic growth has been stable in line with expectations but a bit below potential at around 1%, he said. While wage growth is slowing, from near 5% to an estimated 4.4% for next year, even this looks likely to be above inflation-target-compatible levels, which may be around 3%.

"We have revised down trend potential … productivity growth hasn't been great. So that's also why the current level of wages are pulling up inflation, because we don't have high enough productivity growth to dampen that," Robstad said, noting that manufacturing wage growth was previously exceptionally high though is now cooling.

"Profitability in the manufacturing sector is normalising, making us more comfortable that wage growth will continue to moderate.”

Norwegian krone outperformance, in line with higher oil prices, is also exerting a moderating influence on inflation, he said.

MNI INTERVIEW: Italy To Grow 0.5-6% In 2027 – Confindustria

Italy is likely to grow below the European average by between 0.5% and 0.6% in 2027, which is set to be “a complicated year” as higher interest rates and energy costs coincide with the end of stimulus provided under the EU’s NGEU plan, the head of research at Italian business lobby Confindustria told MNI.

“This year [2026] has been better than expected and we will reach 0.9%, maybe 1%, but these last months won’t be good and will weigh on next year,” Confindustria’s Alessandro Fontana said in an interview, adding that the picture will become more complicated with each month the Iran crisis continues.

About half a percentage point of 2026’s growth has come from NGEU stimulus, which has boosted Italian investment in recent years but mostly ended in August, other than for a smaller portion which Italy will be allowed to spend beyond the programme’s conclusion, Fontana said. Higher rates will also hit business investment, which is also affected by uncertainty over the energy prices, he said.

So far the Italian and global economies have coped better than feared with the Middle East conflict, thanks to a sharp decrease in oil demand in China and Japan, but the margin for natural gas and diesel has now been exhausted, Fontana said.

The diesel price is becoming more of a key energy indicator for Italy’s economy than the oil price, Fontana said, as the government attempts to mitigate the impact of dearer fuel with measures including cuts in excise duties.

DEAL WITH CHINA

While Italy’s exports are performing well, imports are growing at a much faster pace due to surging purchases from China, putting sectors of traditional Italian strength such as fashion, leatherwork and cars at risk, Fontana said. (See MNI: Germany, France To Moot Tougher Trade Options Vs China)

Confindustria wants the EU and China to strike a deal under which Beijing would accept quotas on Chinese products and establish joint-venture factories in Europe, said Fontana, saying that this would be a similar arrangement as that which China imposed on western countries two decades ago. 

“We can’t be tough on China, because our dependency is huge in strategic sectors such as pharma and such an arrangement could still be convenient for both parties,” he said, noting that Beijing faces weak internal demand unable to absorb its industrial over-capacity, while Europe would benefit from technology exchanges in areas such as AI.

“They have an internal demand problem. And we can still be useful for them for five to 10 years. But if we don’t make a deal now, they won’t have the need for a deal. Five years ago, the deal would have been easier and better for us”, he said.

Some of Confindustria’s members are pushing for tariffs and trade barriers, but Fontana said this would be counter-productive, given the relative economic strength of China and the EU.

INVITATION: LIVESTREAM MNI CONNECT With ECB's Cipollone Oct 6

You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.

Details below:

• Speaker: ECB Executive Board Member,Piero Cipollone.
• Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
• Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
• This event will be run as a Zoom Webinar and is a public, on-the-record event.

To register please go to: MNI Webcast Registration