The Fed, the ECB and the BoJ all left policy rates unchanged this week, but the pause was framed as conditional rather than terminal. Expectations in the text point to further tightening: two Fed rate hikes by January, while Japan is seen moving more slowly, with four BoJ hikes projected by the second half of 2028. Policy communication diverged. The ECB adopted a more even-handed tone by balancing upside inflation risks, tied to the size and persistence of the energy shock, against the drag from tighter financial conditions.
ECB Policy and Forward Guidance
In the euro area, the ECB’s statement dropped the line that inflation would stay “well above target for an extended period”, yet the policy trajectory described remained broadly intact, with a December increase still presented as the base case. The rise in sovereign yields was described as a global factor tightening financial conditions, while the Transmission Protection Instrument, or TPI, was reiterated as a backstop if transmission were impaired by disorderly moves not justified by fundamentals.
Focus on Energy Shock and Price Effects
Attention is expected to turn to indirect and second-round effects of the energy shock; September producer prices were characterised as concentrated in energy, electricity-intensive industries and electrical equipment, and linked to IA, while an October European Commission survey showed the sales price index rising but staying in line with recent months.
