Several Central Banks Deterred from Cutting Interest Rates by Geopolitical Strains and Tariff Policy Uncertainty – Currency Thoughts
Several Central Banks Deterred from Cutting Interest Rates by Geopolitical Strains and Tariff Policy Uncertainty
June 17, 2025
The policy interest rate of the State Bank of Pakistan was maintained at 11.0%. That’s just half of the 22.0% peak level during the 12 months ending in June 2024 but still twice the 5.75% low touched in 2016. Pakistani CPI inflation last month was at 3.5%, below the central bank’s target and in line with the expectation of monetary authorities, who nevertheless defended this pause in rate normalization. The inflation outlook according to a released statement “remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments.”
The Central Bank of Armenia’s key interest rate has likewise been left unchanged at 6.0% after the latest policy review. After cresting at 10.75% from December 2022 until an initial cut in June 2023, Armenia’s interest rate was reduced by 150 basis points by the ensuing December, another 225 basis points during 2024 and, most recently, 25 basis points this past February. Armenian consumer price inflation of 4.3% in May, a 26-month high, was above the 4.0% target and up from -1.7% in February 2024.
Most importantly today, the Bank of Japan’s short-term interest rate was yet again left at the very accommodative level of 0.50% that has been policy since a 25-basis point hike in January. This extended pause had been anticipated and was decided unanimously by the nine-person Board after five hours of discussion over two days. Core Japanese inflation (excluding fresh food but not energy) has been hovering around 3.5%, and expectations of inflation have risen moderately. But according to the BOJ released statement today, the Board worries that
It is extremely uncertain how trade and other policies in each jurisdiction will evolve and how overseas economic activity and prices will react to them. It is therefore necessary to pay due attention to the impact of these developments on financial and foreign exchange markets and on Japan’s economic activity and prices.
In a different respect related to balance sheet reduction, BOJ policy did get modified. It’s been announced that the JGB purchases by the central bank will be reduced by JPY 400 billion each quarter up to and during the first quarter of 2026 and then by JPY 200 billion over the ensuing four quarters. Following this predictable and gradual plan, the amount of outright Japanese government bond purchases will throttle back from JPY 4.1 trillion this quarter to JPY 2.1 billion by the first quarter of 2027.
In overnight financial market trading, net dollar movements were extremely confined and unremarkable, but yesterday’s mood surrounding equities took a turn for the worse on re-intensifying fears about the Iran-Israeli war and other worrisome geopolitical developments. After ordering a full evacuation of Tehran, failing to reach a trade deal with Japan, and revealing that a fourfold increase is under consideration in the number of countries subjected to a U.S. travel ban, President Trump abruptly left the G7 annual summit in Canada a day early. Meanwhile, Israel widened the range of missile targets in Iran and continued to shell aid stations in Gaza.
Share prices are down currently by at least 1.0% in Germany, France, Italy and Spain. U.S. futures have given back ground too after yesterday’s rally but not by as much as the European stock markets. The British FTSE has also suffered a smaller loss, helped by news of a British-U.S. trade deal. Japan Nikkei closed 0.6% higher after the BOJ again declined to raise interest rates.
Ten-year sovereign debt yields rose three basis points in Japan and Italy, two bps in France and Spain, and a basis point in the U.K. and Germany, but the 10-year U.S. Treasury yield is three basis points softer. The FOMC’s two-day policy review in the United States begins today, and Fed officials are not expected to change rates at this time. The view that there may be no rate cut this year has gained some support and will no doubt be adjusted further, up or down, depending on what the latest dot-plot graph of individual FOMC member expectations shows when updated forecasts are released tomorrow.
Prices of Bitcoin (-1.0%) and WTI oil (+1.8%) moved in opposite directions overnight. Gold is little changed.
Confidence among investors in the European economic outlook improved more than anticipated this month, according to the German and euro area ZEW expectation surveys. Germany’s expectations index jumped to a 3-month high of 47.5 from 25.2 in May and -14.0 in April and was accompanied by a 10-point rise to -72.0 in the index of perceived current conditions. Likewise, Euroland’s expectations measure printed at a 3-month high of 35.3 following 11.6 in May and -18.5 in April. Current conditions rose to -30.7 from readings of -42.4 and -50.9 in the prior two months. Finally, the reading from inflation expectations was less deeply below zero, printing at -14.7 after -18.1 in May and -3.1 in April.
Kyrgyzstani consumer price inflation accelerated to an 18-month high of 8.0% in May from 7.1% in April and a low last year of 3.8% touched in August.
New Zealand food price inflation climbed to a 17-month highof 4.4% in May.
South Korean import price inflation, in contrast, became more negative, posting a 5.0% 12-month rate of decrease after a 2.5% year-on-year slide in April.
Just in: There has been a disappointing report on U.S. retail sales for the forth time this year. The 0.9% month-on-month drop in May matched January’s slide and adds to a picture of retrenchment also seen in April ( revised lower to -0.1%) and February (no change). Thanks to a a 1.7% advance in March, sales recorded a 4.5% year-on-year increase on average in March-May and a lesser 3.3% in March alone.
Although unchanged in month-on-month terms and up only 0.2% year-on-year, May’s reading for U.S. import prices exceeded analyst expectations slightly. Moreover, the May report masks an underlying acceleration of import price inflation that will undoubtedly swell further once the impact of tariff hikes is embodied more keenly in the data. Non-fuel import prices were up 1.7% from a year earlier, compared to year-on-year advances of 1.2% in April and 0.5% in May 2024. Import fuel dropped 4.0% on month and 15.7% on year in May, which more than reverses a 10.2% jump between May 2023 and May 2024. War in the Middle East has lifted oil costs this month.
Still to come: U.S. industrial production, capacity usage and the NAHB monthly housing market index. Also, Chile’s monetary policy is getting reviewed today, and the G7 summit holds its concluding sessions.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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