The world's major central banks are now at a critical juncture in the fight against inflation, and the course they ultimately choose is likely to determine the direction of the world economy in the coming years.
For now, the options before these central bank decision-making levels are – either believe that the most aggressive tightening in four decades is enough to contain price pressures that are just beginning to ease; Either continue to raise interest rates and ensure that inflation remains on the right path to the 2% target.
Over the next two weeks, the Fed, the ECB and the Bank of England will all have to decide how much further rate hikes they need to make. Among them, the Fed may be closest to the peak interest rate. In addition, the Bank of Japan will also hold a meeting amid constant market speculation, with industry insiders speculating that the bank is approaching the point of transition to the lifting of stimulus measures.
Over the past week, the latest interest rate decisions of the two G10 central banks have highlighted that the global battle to tame high inflation is not as smooth sailing as originally thought.
After a brief pause in rate hikes in April, the RBA surprised investors with another rate hike for the second month in a row last week. The RBA has warned that while it wants to maintain job growth, that doesn't mean it will tolerate prolonged price pressures.
The Bank of Canada was the first central bank in the G7 to pause its rate hike cycle, but it also unexpectedly repressed the rate hike button last week. In its statement, the Bank of Canada said there was "growing concern that CPI inflation could remain elevated, well above the 2% target."
The latest moves by these central banks suggest that the brakes on this wave of global tightening are not so easy to crush. This has further stimulated traders to raise expectations of tighter monetary policy around the world. Bond investors have reacted to this shift by now expecting central banks to push their economies into recession more likely – the yield curve inversion continues to deepen and bond yield curves in the US, Germany, the UK and Canada have flattened further.
Complicating the central bank's assessment is the fact that the pass-through effect of rate hikes has changed differently this time. The labor market remains strong as businesses fear they may not be able to rehire workers when needed. Pent-up pandemic savings continue to support consumer demand.
The ultimate challenge with all this is that no option will be completely risk-free, regardless of the choices made by central bankers. What central banks can do may just be to pick a relatively less bad ending...
Pausing or stopping rate hikes may be the safest way to achieve the soft landing everyone wants. But if it turns out in hindsight that more austerity is needed, it risks repeating the "stop-and-go" policy that wreaked havoc on the US economy in the 1970s. Moreover, doing so could reinforce inflation expectations, all of which have already vexed central bankers who have tried to pause tightening.
The alternative, continued tightening, may be a surest way to beat inflation, but in the process could wreak havoc on the economy and push the global financial system into chaos.
In addition to the decisions themselves, central bank policymakers face communication challenges: any pause or skipping rate hikes risks rekindling "animal spirits" in the market, fueling already bullish stocks, and any final rate hikes that suggest the end of the tightening path are likely to have a similar impact...
From the current market expectations, the Fed may be the first central bank to try to "change" in the next two weeks, the industry generally expects that it will "skip" the interest rate hike this month, but reopen the door to interest rate hikes later this year (most likely in July), and whether this seemingly "middle" route really helps the Fed smoothly reach the end of this round of tightening road, it is still obviously still full of uncertainty...
Here's a background on the world's four major central banks that will hold interest rate meetings in the next two weeks:
Fed
The Fed will hold an interest rate meeting on June 13-14. While the U.S. economy is resilient and inflation persists, most economists now expect the Fed's 15-month cycle of rate hikes to hit pause for the first time this week.
Economists polled by the media predict that the Fed's benchmark interest rate will remain unchanged at 5%-5.25% at this week's meeting, while officials are expected to have a fierce debate about whether to raise rates at the July meeting. The market is now forecasting a 25bp rate hike in July and a possible 25bps cut in December.
Fed Chairman Jerome Powell's discussion of a pause in tightening last month suggests he prefers to assess the lagged impact of previous rate hikes and the impact of recent bank failures on credit supply.
One major uncertainty that Powell and his colleagues are watching closely is the extent to which banks will reduce lending to businesses and consumers after the recent collapses of several regional banks. But as the inflation problem proves intractable, policymakers have also been trying to emphasize that they are nowhere near the time to declare that the task of controlling price pressures is complete.
Nomura economists Aichi Amemiya, Jeremy Schwartz and Jacob Meyer said, "We expect a 'hawkish pause' at the Fed's June meeting, but signal continued rate hikes in the dot plot."
Fed policymakers could indicate their latest expectations for the magnitude of rate hikes this year by updating the interest rate dot plot, which they will release after a two-day meeting this week. In March, 7 out of 19 Fed officials predicted that interest rates would end the year higher than they are now, meaning it would only take a few more officials to revise their rate forecasts upwards to push the median rate estimate higher.
ECB
As for the ECB, when the ECB announces its interest rate decision on Thursday (June 15), it is almost certain that it will raise rates by 25 basis points, and attention will be focused on the public debate among central bank policymakers about when interest rates will peak.
A larger-than-expected slowdown in eurozone inflation last month, combined with more credit conditions, may have led some in the industry to speculate that the ECB may pause tightening in July – coinciding with the one-year anniversary of the start of the ECB's current cycle of interest rate hikes. This will keep the deposit rate at 3.75%.
However, another ECB rate hike in September is still not entirely impossible, especially for some of the more hawkish officials within the bank.
ECB President Christine Lagarde told European lawmakers last week that price pressures in the region remained too great. She said that while some quarters are showing signs of easing inflation, there is no clear evidence that underlying inflation has peaked.
Bank of England
The Bank of England will hold its interest rate meeting next Thursday (June 22), and the policy dilemma facing the bank is perhaps the most severe. On the one hand, inflation is higher – still high at 8.7%, and a tightening labor market makes a terrible wage-price spiral an ever-present threat. On the other hand, the International Monetary Fund (IMF) has previously predicted that the UK's economic growth rate this year will be only 0.4%.
Currently, the high interest rate of 4.5% is squeezing the UK economy, and the market expects the BoE's benchmark interest rate to reach a further 5% in the future - a 25 basis point rate hike by the Bank of England next week will be a sure thing.
Howard Davies, chairman of NatWest Group and former deputy governor of the Bank of England, said it took an average of about 18 months for policy to take effect. "And we are now entering a period where the negative effects of austerity are starting to be felt."
However, the toughest test for the Bank of England at the moment is credibility. Some British politicians have slammed the Bank of England for failing to respond to inflation threats in a timely manner, and a second failure would be seen as inexcusable...
Bank of Japan
The Bank of Japan will announce its interest rate decision this Friday, June 16. Some economists say that with Japan's inflation above 2% target for more than a year, the BOJ may be getting closer to the moment of shift away from ultra-loose monetary policy...
Although Bank of Japan Governor Kazuo Ueda insisted that he did not see the need for an immediate change of course. No major policy shift at the Fed's interest rate meeting this week is also widely expected, but economists, including Goldman Sachs and BNP Paribas, have expected the Bank of Japan to tighten policy next month.
Kazuo Ueda had previously argued that after years of deflation, the cost of adjusting policy too early was greater than waiting. Real wages for workers are still falling, affecting consumers' spending power, which is urgently needed to maintain 2% inflation.
Still, considering that any move by the BOJ to move away from ultra-loose policy would be less disruptive while other large central banks around the world are still tightening, it means that if Kazuo Ueda waits too long, the door left for him could close...
This article is from CaiLian News