Global central banks shift policy as inflation cools.

Global central banks shift policy as inflation cools.

Central Banks Signal Cautious Stance on Interest Rates

A Year of Global Monetary Tightening May Be at an End

In a surprising turn of events, top central banks have expressed a more cautious stance towards further interest rate hikes, despite cooling inflation. The U.S. Federal Reserve and the European Central Bank (ECB) recently delivered quarter-percentage-point rate increases, as expected. However, they have now indicated that future rate hikes will depend on the trajectory of inflation. This shift in tone suggests that the global round of monetary tightening, which has been ongoing for over a year, may be coming to an end.

The Bank of England is also expected to raise rates again following positive inflation news. Meanwhile, the Bank of Japan, known for its dovish policies, has surprised markets by considering plans to bring its ultra-loose policies to an end.

A Broader Approach to Price Movements

Previously, central bank policymakers had insisted on seeing actual declines in the pace of price rises as evidence of progress. However, they are now taking a more comprehensive approach in evaluating price movements. This new perspective allows for slower job and economic growth to serve as indicators that inflation will continue to fall.

This subtle shift injects a dose of patience into the debate over whether more rate hikes are necessary. Federal Reserve Chair, Jerome Powell, commented, “Given how far we’ve come, we can afford to be a little patient as well as resolute as we let this unfold.” Powell emphasized the importance of moderate economic growth and restoration of supply and demand balance, particularly in the labor market.

The Fed’s benchmark overnight interest rate now stands in the 5.25% – 5.50% range, while the ECB’s main rate is 3.75%.

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ECB President Signals a Pause

ECB President Christine Lagarde acknowledged a slight change in the bank’s latest policy statement, highlighting that it was not random or irrelevant. This change was meant to communicate that a pause in rate increases would be considered at the central bank’s meeting in September, aligning with the U.S. central bank’s approach.

Lagarde stated, “We have an open mind as to what the decision will be in September and subsequent meetings. We might hike. We might hold.” She emphasized that the ECB is not engaged in forward guidance.

The Path to a Global Pause Still Uncertain

New U.S. gross domestic product (GDP) data revealed that the path to a global pause in rate hikes is far from clear, despite growing at a faster-than-anticipated rate of 2.4% annualized in the second quarter. This figure was well above the 1.8% annualized rate that Fed officials consider consistent with their 2% inflation target. However, quarterly inflation data came in weaker than expected.

Although there is still a “material risk” that inflation may necessitate further hikes, analysts believe that in the base case, both the ECB and the Fed have completed their rate-raising cycles.

Conclusion

Central banks’ cautious stance on further interest rate hikes signals a potential end to the year-long global monetary tightening. This shift in tone reflects a more comprehensive approach to evaluating price movements and allows for slower economic growth to serve as evidence of declining inflation. With the U.S., European, and Japanese central banks adopting a more patient outlook, the days of coordinated global tightening may be numbered. While uncertainties remain, the overall trend suggests that rate hikes may be put on hold in the near future.

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