Daily Management Review

With Slowing Inflation, Global Central Banks Start To Change Their Policies


The world's top central banks resumed raising interest rates this week despite falling inflation, but they are now taking a more cautious approach to future movements, suggesting that the year-long cycle of global monetary tightening may be coming to an end.
As anticipated, the U.S. Federal Reserve and the European Central Bank raised interest rates by a quarter of a percentage point this week, and both institutions left the door open for future rises if inflation didn't keep falling at the faster-than-expected rate on both sides of the Atlantic.
Following similar encouraging inflation reports, the Bank of England is anticipated to raise rates once more the following week.
In the meantime, the Bank of Japan started a discussion on how to end its ultra-loose policies on Friday.
It has continued to be a dovish outlier by maintaining ultra-low rates, but on Friday it shocked the markets by changing its yield control policy and letting long-term borrowing costs to increase even further, reflecting expectations of a slowing increase in inflation.
Top policymakers have been using a rhetoric of "hike first" frequently in Europe and the US since last year.
However, that is now accompanied by a broader perspective on how prices are changing alongside the overall state of the economy, a more all-encompassing approach that might allow slower economic and job growth to act as independent proof that inflation will continue to decline.
This represents a shift from policymakers' previous insistence that actual slowdowns in the rate of price increases were necessary to know that progress was being made. It may also inject what Fed Chair Jerome Powell called a dose of patience into the discussion about whether further rate hikes are necessary.
The benchmark overnight interest rate for the Fed is currently between 5.25% and 5.50%, whereas the key rate for the ECB is 3.75%.
"Given how far we've come, we can afford to be a little patient as well as resolute as we let this unfold," Powell said in a press conference on Wednesday following the Fed's decision to raise rates for the 11th time in its last 12 meetings.
"We want to see economic growth running at moderate or modest levels to help ease inflationary pressures. We want to see continued restoration of supply and demand balance, particularly in the labor market ... We see those pieces of the puzzle coming together."
A slight wording change in the ECB's most recent policy statement, according to President Christine Lagarde, was "not just random or irrelevant," but rather intended to convey that, after nine straight rate increases, a pause would be on the table at the central bank's meeting in September, just as it will be for the U.S. central bank.
"We have an open mind as to what the decision will be in September and subsequent meetings," Lagarde said. "We might hike. We might hold ... I hope it is very clear that we are not in the domain of forward guidance."
On Thursday, fresh statistics on the U.S. gross domestic product demonstrated that the way to a worldwide halt was far from certain in a still-mysterious economy.
In the second quarter, the economy expanded at a faster-than-expected 2.4% annual rate, significantly higher than the 1.8% annual rate that Fed officials view as the general trend compatible with their 2% inflation target. Nevertheless, the quarterly inflation numbers were weaker than anticipated.
Bond markets responded to the greater growth by driving up Treasury rates, but the days of coordinated global tightening may be coming to an end.
Evercore ISI Vice Chairman Krishna Guha said that while there remained a "material risk" that inflation would still necessitate future increases, "in the base case, the ECB - like the Fed - is done raising rates."