BOJ Hikes Rates to 1.25% and Signals Further Tightening as Sovereign Rating Actions Hit Cyprus and Poland

The Bank of Japan raised its policy rate by a quarter point to 1.25% on Friday, a move anticipated by all economists surveyed by Bloomberg. Governor Ueda signaled openness to additional tightening, though the hike failed to materially buoy the yen, underscoring how markets are recalibrating to a more aggressive pace of BOJ normalization driven by persistent price pressures from the Middle East conflict, strong global AI demand and a weaker currency.

On the sovereign credit front, S&P upgraded Cyprus to A/A-1, citing debt reduction, marking a significant improvement in the island nation's fiscal standing. In contrast, Moody's cut Poland's local-currency debt rating one notch to A3, attributing the action to fiscal deterioration as Warsaw's NATO-leading defense spending and rising social costs have pushed debt higher. Moody's separately confirmed Enova's rating at B1 while shifting the outlook to stable.

In the U.S. fixed-income market, investors pulled roughly $1.8 billion out of municipal bonds over the week, extending a sustained retreat as returns for state and local government debt are on track to fall for a third consecutive month. The selloff has pushed muni yields to their highest levels in months, with a $3.6 billion Schwab municipal bond ETF heading toward its largest monthly outflow on record.