Dollar, yuan, yen and euro banknotes.
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From hawkish pauses to rate hikes and dovish tones, the world’s largest central banks proposed wildly different monetary policy tones last week.
The European Central Bank hiked interest rates on Thursday, surprising markets with a worsening inflation outlook, prompting investors to price in even stronger interest rate hikes in the euro zone.
This came after a Federal Reserve meeting where the central bank decided to suspend interest rate hikes. Just days earlier, the Chinese central bank cut its main medium-term lending rates to stimulate the economy. In Japan, where inflation is above target, the central bank has kept its ultra-loose policy unchanged.
“The aggregate of these different approaches not only shows that there seems to be a new divergence about the right monetary policy approach, but also makes it clear that the global economy is no longer synchronized, but is an accumulation of very different cycles,” says Carsten Brzeski, Global Head of Macro at ING Germany, CNBC said via email.
In Europe, inflation has fallen in the euro area but is still well above the ECB target. This is also the case in the UK, where the Bank of England is expected to hike interest rates on Thursday after very strong jobs data.
The Fed, which started its rate hike cycle before the ECB, decided to take a break in June – but announced there would be two more rate hikes later this year, meaning its hike cycle is not over yet.
In Asia, however, the picture is different. China’s economic recovery is faltering as both domestic and external demand slows, prompting policymakers to step up support measures to restart the economy.
In Japan – which has struggled with a deflationary environment for many years – the central bank said it expects inflation to ease later this year and chose not to normalize policy just yet.
“Any central bank [tries] “The problem needs to be solved for its own economy, which of course includes consideration of changes in financial conditions imposed from abroad,” said Erik Nielsen, group chief economics advisor at UniCredit, via email.
Impact on the market
The Euro The exchange rate rose to a 15-year high against the Japanese yen on Friday, according to Reuters. The euro also broke the $1.09 line as investors digested the ECB’s hawkish tone last Thursday.
In bond markets, the German 2-year bond yield rose another three months on Friday on expectations that the ECB will continue its approach in the near term.
“It makes sense that we see this divergence. In the past, it was clear that there was plenty of room for virtually all major central banks to cover, whereas now, given the different stages that jurisdictions are in the cycle, that will be the case.” “More nuanced decisions are needed be taken,” Konstantin Veit, portfolio manager at PIMCO, told CNBC’s Street Signs Europe on Friday.
“This will indeed create opportunities for investors.”
ECB President Christine Lagarde was asked during a news conference to compare her team’s decision to hike rates to the Federal Reserve’s decision to pause.
“We’re not thinking about a break,” she said. “Are we done? Have we finished the journey? No, we haven’t reached our goal yet.” [the] Target,” she said, pointing to at least one more possible rate hike in July.
For some economists, it is only a matter of time before the ECB finds itself in a position similar to that of the Fed.
“The Fed runs the ECB [as] The US economy is a few quarters ahead of the eurozone economy. “This means that after the September meeting at the latest, the ECB will also be confronted with the debate about a break,” said Brzeski.
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