Diverging inflation trajectories may drive nations to break from uniform monetary policy
ALBAWABA – Stubborn inflation is pushing central banks across the Atlantic and worldwide to part ways with conventional uniform monetary policy, as countries weigh policy impact on economic growth, in light of diversion inflation trajectories.
Central banks around the world are looking to the United States (US) Federal Reserve (the Fed) for guidance on interest rates and monetary policy. But they each have their own economic monsters to slay.
Economists and analysts have anticipated yet another US rate hike in July or August, news agencies have reported.
Inflation in the US only recently began to slow down, after more than a year of consecutive rate hikes. While inflation in the United Kingdom (UK) and Eurozone is barely starting to decelerate.
Others have underlined that singular inflation readings in June may not be sufficient for central banks, the Fed included, to call an end to the rate hike cycles, let alone announce rate cuts any time soon.
An aggregate gauge of borrowing costs calculated by Bloomberg Economics now shows a peak of 6.25 percent in the current quarter. That’s up from the 6 percent foreseen three months ago.
“The first leg of the fight against inflation is nearing an end and rates will soon top out. For the second half, the big question is, for how long? Our forecasts show underlying inflation on a slow descent. Absent a sudden economic slump, rate cuts in advanced economies like the US, euro area and UK are unlikely until mid-2024,” Bloomberg said.
Divergence of monetary policy
Inflation is decelerating at very different rates across different countries, all of which gauge monetary policy requirements against current inflation and Fed rates.
Across the Atlantic
In the US, “sticky core inflation will likely prompt the FOMC [the Fed] to raise the fed funds rate target range by another 25 basis points, bringing the upper end of fed funds rates to 5.5 percent. Cooling economic activity and rising unemployment will keep policymakers from further raising rates thereafter. In spite of the downturn, the Fed will likely opt to hold policy rates at the peak level of 5.5 percent for the rest of the year rather than cutting rates,” Anna Wong told Bloomberg.
As for Europe, despite the unprecedented single-year 4 percent rate hikes, the clear message from the European Central Bank (ECB) is that the hikes are far from over.
Another increase in July is highly anticipated, as was essentially been pre-announced.
Voices calling for a pause are being drowned out by hawks keen on further tightening of monetary policy come fall, Bloomberg reported.
According to David Powell, “The ECB is approaching the end of its hiking cycle. Underlying inflation has crested and monetary tightening is having a significant impact on credit conditions.”
Bloomberg Economics forecasts a 0.5 percent rate hike, in two 25-point instalments in July and September.
“We expect the first cut in June of next year as underlying inflation decelerates,” Powell said.
Going in the other direction, is Japan.
US banking crisis bolstered the Japanese central bank’s position on their yield-curve control (YCC) framework.
Bank of Japan’s new governor Kazuo Ueda will likely “keep the YCC framework until sometime in the second half of 2024. And any new policy will still be accommodative, probably anchoring the policy rate at zero and keeping up the bond buying,” Taro Kimura told Bloomberg.
In the meantime, inflation in the UK is proving difficult to brake.
Four months of higher-than-forecast inflation have left investors convinced that the most aggressive monetary tightening seen in the UK in over three decades still has a long way to go.
Money markets are betting the BOE will raise rates to 6.25 percent by February, their highest level since 1999.
Governor Andrew Bailey and his colleagues did nothing to refute said expectations on June 22, when the Bank of England delivered their 13th consecutive hike. Taking the benchmark rate to 5 percent.
Bailey even insinuated that market expectations of a “short-lived” rate peak may very well be wrong.
Prices are proving far “stickier” than expected, underpinned by a tight labor market and strong corporate pricing power, according to Bloomberg.
While headline inflation in the UK is falling as the energy shock fades, the core measure is above 7 percent and is expected to recede only slowly. There are growing fears that a recession may be the price of finally taming consumer prices, Bloomberg experts have warned.
Members of the BRICS
Recent economic data showed the world’s second-largest economy is struggling.
China’s economic recovery is losing momentum, data cited a slowdown in consumer spending, which has been a main driver of the rebound this year China finally shed its Covid Zero rules.
Demand is weak and confidence has failed to gain much traction.
The PBOC cut rates in June for the first time in nearly a year, fueling speculation that monetary policy is loosening up and there may be more easing on the way.
Nonetheless, officials have been slow to announce any concrete stimulus package, and Bloomberg economists have cautioned that support will likely be moderate.
Economists surveyed by Bloomberg still expect China’s gross domestic product to expand 5.5 percent this year, above the government’s conservative target of about 5 percent.
In India, however, inflation has inched closer to the mid-point of the Reserve Bank of India’s 2-6 percent target range. but the central bank is wary of risks from uneven rains and geopolitical tensions.
Its monetary policy panel unanimously voted to keep the key rate unchanged for the second straight meeting in June.
The panel also retained the policy stance on “withdrawal of accommodation,” with Governor Shaktikanta Das reaffirming it was a pause and not a pivot toward rate cuts.
For Brazil, it is a different story.
Inflation has slowed down, but the central bank has refrained from clearly signaling the start of a monetary easing cycle.
The central bank did confirm that there will be no rate hikes in the foreseeable future, with the benchmark rate, Selic, pinned at 13.75 percent for a seventh straight meeting, in June.
Consumer prices rose 3.94 percent a year in May, which is within the central bank’s tolerance range.
“Slower headline inflation and a new fiscal framework in Brazil will prompt the central bank to start unwinding the sharp policy tightening it began in 2021. We expect a gradual easing process to begin in the third quarter, with policy normalized by the end of 2024. Questions on the neutral interest rate level limit how much the Selic can fall — we see the terminal rate in the high single digits,” Adriana Dupita told Bloomberg.
While many central banks are preparing to halt monetary tightening or even pivot to rate cuts, the Bank of Russia is setting the stage for its first hike in official borrowing costs in 17 months.
The central bank has not raised interest rates since the immediate aftermath of Russia’s invasion of Ukraine, more than a year and a half ago.
Heavy government spending, given the war effort, and labor shortages are putting pressure on prices, driving inflation, Bloomberg reported.
Their benchmark has been pinned at 7.5 percent since September, the longest pause in more than seven years.
However, with data and reports indicating that the Russian economy is performing better than anticipated, many analysts say a rate hike will likely be discussed in July or September.
“Russia’s central bank will likely start hiking by September, pushing the policy rate to 8 percent at end-2023. A weaker ruble and a sharp increase in loan growth will probably push inflation to 5 percent-6 percent, up from its current on-target level of 4 percent. Historically, breaches of the target lasting 2-3 months tended to prompt the Bank of Russia to raise rates. We expect this pattern to hold this year,” as reported by Bloomberg experts.
Inflation in South Africa, on the other hand, is on track to returning to the South African Reserve Bank’s 3-6 percent target range.
Regardless, the country’s monetary policy committee will likely hold the key rate at its highest level since 2009 for the rest of the year while keeping a close eye on the currency, the rand.
A sharp depreciation against the US dollar could drive up inflation and interest rates again.
Monetary policy forecasts by Bloomberg
US Federal Reserve
Current federal funds rate (upper bound): 5.25 percent
Bloomberg Economics forecast for end of 2023: 5.5 percent
Bloomberg Economics forecast for end of 2024: 4.75 percent
European Central Bank
Current deposit rate: 3.5 percent
Bloomberg Economics forecast for end of 2023: 4 percent
Bloomberg Economics forecast for end of 2024: 3.25 percent
Bank of Japan
Current policy-rate balance: -0.1 percent
Bloomberg Economics forecast for end of 2023: -0.1 percent
Bloomberg Economics forecast for end of 2024: 0 percent
Bank of England
Current bank rate: 5 percent
Bloomberg Economics forecast for end of 2023: 5.75 percent
Bloomberg Economics forecast for end of 2024: 5 percent
Bank of Canada
Current overnight lending rate: 4.75 percent
Bloomberg Economics forecast for end of 2023: 5 percent
People’s Bank of China
Current 1-year medium-term lending rate: 2.65 percent
Bloomberg Economics forecast for end of 2023: 2.45 percent
Bloomberg Economics forecast for end of 2024: 2.35 percent
Reserve Bank of India
Current RBI repurchase rate: 6.5 percent
Bloomberg Economics forecast for end of 2023: 6.5 percent
Bloomberg Economics forecast for end of 2024: 5.5 percent
Central Bank of Brazil
Current Selic target rate: 13.75 percent
Bloomberg Economics forecast for end of 2023: 12 percent
Bloomberg Economics forecast for end of 2024: 9 percent
Bank of Russia
Current key rate: 7.5 percent
Bloomberg Economics forecast for end of 2023: 8 percent
Bloomberg Economics forecast for end of 2024: 7.5 percent
South African Reserve Bank
Current repo average rate: 8.25 percent
Median economist forecast for end of 2023: 8.25 percent
Median economist forecast for end of 2024: 7.5 percent
Banco de Mexico
Current overnight rate: 11.25 percent
Bloomberg Economics forecast for end of 2023: 10.75 percent
Bloomberg Economics forecast for end of 2024: 6.75 percent
Bank Indonesia
Current 7-day reverse repo rate: 5.75 percent
Bloomberg Economics forecast for end of 2023: 5.25 percent
Bloomberg Economics forecast for end of 2024: 4.75 percent
Central Bank of Turkey
Current 1-week repo rate: 15 percent
Bloomberg Economics forecast for end of 2023: 24 percent
Bloomberg Economics forecast for end of 2024: 20 percent
Bank of Korea
Current base rate: 3.5 percent
Bloomberg Economics forecast for end of 2023: 3.5 percent
Bloomberg Economics forecast for end of 2024: 2.75 percent
Reserve Bank of Australia
Current cash rate target: 4.1 percent
Bloomberg Economics forecast for end of 2023: 4.35 percent
- Bloomberg Economics forecast for end of 2024: 3.25 percent
