The world’s major central banks, with the exception of the BOJ, are in tightening mode due to rising inflation.
In this article, we will look at the Fed, BOE, ECB, BOC, and BOJ. Where has each bank currently set its monetary policy and where is it likely to move rates at its next meeting?
The Fed – Hawkish
The US Federal Reserve currently has rates pegged at 1.75% after raising rates by 75 basis points in its last central bank interest rate decision meeting. After an 8.6% YoY CPI for May and higher inflation expectations, the Committee decided that a 75bp rate hike was appropriate. However, the FOMC is not over yet. At the press conference that followed, Fed Chairman Powell said that while he doesn’t expect a 75 basis point hike to be common, the FOMC will decide between 50 and 75 basis points at its July meeting. The Committee is very attentive to the risks of inflation and sees the risks on the upside. June 22n/aPowell testified before the Senate Banking Committee and echoed the following statements from the June interest rate decision meeting:
- The US economy is very strong and can withstand tougher policy
- Appropriate ongoing hikes, meeting-by-meeting decisions
- The Fed is firmly committed to bringing inflation down to 2%.
According to the CME’s Fedwatch tool, markets expect an 88.5% chance that the Fed will raise interest rates by 75 basis points to 2.50% at the July meeting:
BOC – Falcon
The Bank of Canada currently has interest rates pegged at 1.5% after raising rates by 50 basis points in its last central bank interest rate decision meeting. Main subject of concern: the rise in inflation. The BOC noted in its statement that inflation “will rise further in the near term, before starting to subside,” particularly in the food and energy sectors. Indeed, the CPI print for June was 7.7% yoy versus an April reading of 6.8% yoy. It was the highest reading since January 1983! Core CPI for June was 6.1% yoy compared to 5.7% yoy in April. The central bank also noted that “Canadian economic activity is strong and the economy is clearly operating beyond demand. Consequently, the Board of Governors estimated that interest rates will have to rise further. Additionally, the statement said members are ready to “act more forcefully” if needed to achieve the 2% inflation target. The BOC will also continue its quantitative easing measures by continuing to reduce its balance sheet. Current expectations are for a 50 basis point interest rate hike at its July meeting, but a 75 basis point hike is also on the cards.
BOE – Less Hawkish
The Bank of England currently has rates pegged at 1.25% after raising rates by 25 basis points at its last central bank interest rate decision meeting. It was the 5e consecutive rise in rates in a row. The BOE noted that it forecast inflation at 11% in October and over 9% in the coming months. June 22n/a, the UK released its May CPI at 9.1%, in line with expectations. The central bank recently said it now expects Q2 GDP at -0.3% vs. +0.1% previously. This is in line with worse than expected economic data the UK has released recently, including manufacturing output, industrial output and change in claimant numbers. The BOE fears a rise in inflation, as it worries about the effect it could have on household incomes. As a result, members are reluctant to increase rates aggressively. However, the statement also said she would act forcefully, if necessary. In a recent speech, the BOE’s Pill emphasized the statement’s “if necessary” phrase. Expect the BOE to cautiously seek to raise interest rates by 25 basis points in the blink of an eye until growth resumes.
ECB – Less Hawkish
The European Central Bank currently has rates set at -0.50% after leaving them unchanged at the June interest rate decision meeting. However, the ECB pre-committed to a 25 basis point hike at the July meeting, with some ECB members speculating it could be 50 basis points. After May’s final reading of 8.1% year-on-year, the ECB is concerned about the fragmentation of countries within the eurozone when it starts raising interest rates next month. So on June 15e, the ECB held an extraordinary meeting to discuss the recent rise in interest rates in peripheral countries relative to those in core countries. The result was twofold:
- Flexibility regarding the reinvestment of maturing repayments in the PEPP portfolio. (The ECB will also officially end its APP bond buying program on July 1st)
- A new committee that will design a new anti-fragmentation instrument. (As of June 22n/ade Guindos of the ECB said the Governing Council has yet to discuss the details of the anti-fragmentation tool).
Eurozone releases preliminary print of June CPI on July 1st. This may help the Committee decide whether to raise rates by 25 basis points or 50 basis points at its July meeting. Also, look for clarification on the anti-fragmentation tool.
USD/JPY is at its highest level in 24 years. Despite this, the Bank of Japan currently has rates pegged at -0.1% after leaving them unchanged at the June interest rate decision meeting. In addition, the central bank said it would continue its control of the yield curve and its daily bond purchases. Additionally, the Committee said it would continue to buy unlimited amounts of bonds to defend the 0.25% cap on the 10-year JGB. The BOJ said it expects the CPI (excluding fresh food) to likely stay around 2%, although high uncertainties remain, particularly those related to the coronavirus in Japan and the Russian-Ukrainian war. . BOJ Governor Kuroda was also very specific in adding that the central bank will take further action. relaxation steps as needed. This is contrary to most other central banks around the world, which are currently tightening monetary policy. Japan will release its May CPI data on Friday. Expectations are 2.3% YoY versus 2.5% YoY in April. BOJ meets again on July 21stand unless inflation rises significantly, expect the BOJ to remain on hold once again.
Tradingview, Pierre X
The world’s major central banks, with the exception of the BOJ, are in tightening mode due to rising inflation. How much will central banks need to raise rates to bring inflation back towards (most) the central bank’s 2% inflation target? Moreover, will raising rates too high lead to a recession? Central banks will have to walk a fine line in their decisions on whether to raise rates aggressively or not!