Fed, Europe and Japan Hold Rates; Canada Raises by 25 Basis Points
Key Facts
The US Federal Reserve kept its target range at 3.75% to 4% on October 28, while the European Central Bank held its key interest rates the following day, and the Bank of Japan kept its rate at about 1.25% on October 30. The three decisions came at separate meetings, amid persistent inflation and as the banks monitored the course of economic activity. By contrast, the Bank of Canada raised its interest rate by 25 basis points to 2.5% on October 28, making holds a trend among several major banks rather than a unified global shift. The divergent paths across economies reflect different monetary policy decisions at the end of the month. Votes in Washington and Tokyo also showed members who favored rate increases, while market expectations pointed to the possibility of a US increase in December.
The Fed’s Federal Open Market Committee voted 10-2 to keep the target range at 3.75% to 4%. Lisa Cook and Beth Hammack favored raising it by a quarter percentage point, a dissent that revealed divisions within the committee over the appropriate step. The Fed said economic activity “has been expanding at a solid pace,” but also noted that inflation “remains elevated.” It added that gathering more information would help the committee determine the appropriate stance of policy. The statement puts forthcoming data at the center of the bank’s assessment, without pre-announcing a decision on the next meeting.
On October 29, the European Central Bank kept its deposit facility rate at 2.50%, its main refinancing rate at 2.65%, and its marginal lending rate at 2.90%. The bank said the energy shock raises inflation risks and lowers growth risks, pointing to policymakers’ trade-off between price pressures and the possibility of slowing activity. The European hold came the day after the Fed’s decision, but was based on the bank’s assessment of the euro area and its conditions. The decision made no change to the three rates. Developments in energy prices and their risks to inflation and growth remain among the factors the bank cited in its assessment.
On October 30, the Bank of Japan kept its target rate for uncollateralized overnight borrowing at about 1.25%, by an 8-1 vote. The dissenting member proposed a target of about 1.5%, reflecting a preference for a higher level than the rate approved by the majority. Alongside its rate decision, the bank announced that the pace of sales of its exchange-traded fund holdings would amount to about 860 billion yen a year at book value. The new pace is scheduled to take effect in January 2027. This is a separate path from interest rates, but it also sets out a forthcoming step in managing the bank’s holdings.
In Canada, the central bank raised its interest rate by 25 basis points to 2.5% on October 28, diverging from the US, European and Japanese hold decisions. The report’s framing linked the tightening decision to inflation risks exacerbated by the energy shock. The bank said a further increase may be necessary, but indicated it would proceed cautiously. That means October’s decision did not close the door on another increase, without setting a confirmed date for one. The divergence in paths remains important for comparing the approaches of banks that faced different pressures and assessments in the same month.
Following the Fed’s October 28 decision, the S&P 500 rose 0.3%, the Dow Jones Industrial Average gained 0.2%, and the Nasdaq Composite advanced 0.3%. An Associated Press report said the yield on two-year US Treasury notes reversed direction after traders cut their expectations for further increases. In a review published on October 29, Reuters said traders priced in an 80% chance of a Fed rate increase in December. The review quoted the Reserve Bank of New Zealand governor describing the possibility of a December increase as high, with the market estimating the likelihood at about 80%. These are market estimates and remarks attributed to their speakers, not announced decisions on forthcoming meetings.