The world’s largest central banks struck significantly various monetary policy tones last week, ranging from hawkish pauses to rate rises to dovish tones.
The European Central Bank raised interest rates on Thursday, surprising markets with a worsened inflation outlook, prompting investors to price in even more rate hikes in the eurozone.
This came after the Federal Reserve voted to postpone rate rises at its meeting. Just a few days before, China’s central bank reduced its main medium-term lending rates in an effort to support the economy. In Japan, where inflation is over the goal, the central bank has maintained its ultra-easy policy.
“Taking all of these different approaches together shows that there appears to be a new divergence on the right approach for monetary policy, but it also demonstrates that the global economy is no longer synchronized, but rather a collection of very different cycles,” Carsten Brzeski, global head of macro at ING Germany, told CNBC via email.
throughout Europe, inflation has fallen throughout the eurozone but remains significantly over the ECB objective. This is also true in the United Kingdom, where the Bank of England is poised to hike interest rates on Thursday following exceptionally strong labor statistics.
The Fed, which began its hiking cycle before the ECB, opted to take a pause in June, but announced two more rate hikes later this year, implying that its hiking cycle is not yet over.
However, the scenario is different in Asia. China’s economic recovery is slowing, with decreases in both domestic and overseas demand prompting officials to increase support measures in an effort to jump-start activity.
In Japan, which has been dealing with deflation for many years, the central bank said it expects inflation to fall later this year but has decided not to normalize policy just yet.
“Each central bank [tries] to solve for its own economy, which obviously includes considerations for changes in financial conditions imposed from abroad,” said Erik Nielsen, UniCredit’s group chief economics advisor, in an email.
Market Influence
According to Reuters, the euro soared to a 15-year high versus the Japanese yen on Friday as a result of the different monetary policy choices. As markets digested the ECB’s aggressive tone last Thursday, the euro also broke over the $1.09 mark.
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In bond markets, the yield on the German 2-year bond rose to a new 3-month high on Friday, reflecting expectations that the ECB will stick to its current policy in the short term.
“It seems logical that we’re starting to see this disparity. “In the past, it was clear that there was a lot of room to cover for pretty much all of the major central banks,” Konstantin Veit, portfolio manager at PIMCO, told CNBC’s Street Signs Europe on Friday. “Now, given the different stages, the jurisdictions are in the cycle, there will be more nuanced decisions to be made.”
During a news conference, ECB President Christine Lagarde was asked to compare her team’s decision to raise rates to the Federal Reserve’s choice to halt.
“We are not thinking about pausing,” she explained. “Are we finished?” Have we completed our journey? “No, we are not there yet,” she added, pointing to at least another rate rise in July.
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Some analysts believe it is only a matter of time until the ECB finds itself in a situation similar to the Fed.
“The Fed is ahead of the ECB by a few quarters, as the US economy is ahead of the eurozone economy by a few quarters.” This indicates that, at the very least, following the September meeting, the ECB will be forced to decide whether or not to halt,” Brzeski added.
