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6 Mar 2025
GBP/JPY declines to near 191.50 amid hawkish outlook for BoJ’s policy
- GBP/JPY faces downward pressure amid growing hawkish expectations for the BoJ’s policy stance.
- Japan’s 10-year government bond yield surpassed 1.5%, reaching its highest level in over 15 years.
- The Pound Sterling may recover as Bank of England officials strike a cautious tone.
GBP/JPY holds losses after registering gains in the previous four successive days, trading around 191.60 during the early European hours on Thursday. The decline comes as the Japanese Yen (JPY) strengthens in response to a hawkish outlook from the Bank of Japan (BoJ) on its monetary policy.
Japan’s 10-year government bond yield surged past 1.5% on Thursday, marking its highest level in over 15 years. This rise was influenced by a broader rally in European bond yields, following Germany’s announcement of a €500 billion infrastructure fund and plans to reform borrowing rules. These measures are expected to bolster growth in Germany, driving investor sentiment.
Bank of Japan Deputy Governor Shinichi Uchida reaffirmed this week that the central bank would consider further interest rate hikes if economic conditions meet expectations. Uchida emphasized that Japan is at the initial stages of exiting its prolonged monetary easing policy, signaling a potential shift towards a more restrictive stance.
On Thursday, Japan’s Vice Finance Minister for International Affairs, Atsushi Mimura, addressed concerns over rising global protectionism, including tariff measures. Mimura stressed the need to find a balanced approach to mitigating the negative effects of globalization while preventing an outright slide into protectionist policies.
The GBP/JPY cross could regain its ground following cautious remarks from Bank of England (BoE) officials. BoE Governor Andrew Bailey, testifying before the Treasury Select Committee on Wednesday, stated, “We do expect a pick-up in inflation, but it will be nothing like a few years ago. I think it's less likely we will get second-round inflation effects due to a weakening economy.”
Meanwhile, BoE policymaker Megan Greene, also speaking before the Treasury Committee, emphasized a cautious and gradual approach to easing monetary restrictions. Greene noted, “It's likely inflation persistence will fade on its own accord,” while reiterating that monetary policy will likely need to remain restrictive.
BoE Chief Economist Huw Pill also addressed lawmakers in Parliament, stating, “We do need to remain vigilant to new shocks that might hurt the path back to 2% inflation. Evidence points against more rapid cuts in bank rates for me.”
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.