UBS On-Air: Paul Donovan Daily Audio 'Setting rates'
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Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 24th of January. The Bank of Japan raised rates a quarter point today to 0.5% having signalled this via the media in advance.

the bank appears to have confidence that wage gains will be more robust, allowing real incomes to rise, and also that Japan's economy will not be too damaged by the incoming US administration's policies. Like other central banks, the Bank of Japan is essentially tracking inflation. The difference, of course, is that the trend in Japan is mildly up rather than mildly down.

At this stage, we would anticipate a further rate hike in the second half of this year and then a hike in 2026, bringing the rate to 1%. ECB President Lagarde is speaking today. The fact that the remarks are being made in Davos perhaps increases the media attention around them, but there is less uncertainty about the ECB's outlook and markets are confident that rate cuts will keep coming.

Assorted sentiment surveys are due in the euro area, and the final Michigan sentiment survey is due from the States. The Michigan data at least reminds investors of the potential for significant political bias in these numbers. US President Trump yesterday declared that they knew interest rates better than the Federal Reserve and certainly better than Fed Chair Powell.

Passing over that latter point, Trump's claims to rate omniscience are perhaps somewhat undermined by their statement at the World Economic Forum in Davos that the recent inflation episode was probably the highest in the history of the United States. Inflation has been higher four times during Trump's admittedly very long life, twice when he was a child in the 1940s and the early 1950s, and then again in the 1970s and in the 1980s.

Inflation is considered important to understanding interest rates because real interest rates are often the critical variable. Markets have been getting mixed signals on the prospect of US taxing imports. At Davos, the remarks by Trump seem to imply a universal tariff on all imports.

That is troubling because the economic damage to the US economy of a US tariff that is universal is a lot higher than would be the case with a tariff that was selective. Universal tariffs cannot be avoided except by smuggling, in contrast to selective tariffs where supply chain rerouting can avoid the tax, as is the case with up to a third of China's exports to the United States.

However, later Trump declared that they would rather not tax imports from China. This flip-flopping on whether or not to raise US consumer taxes is, perhaps, part of Trump's unpredictable management style. The concern is that it might add a risk premium to doing business in the United States. That's all for today. Have a good day.

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