By Yuan Yujing
During the European Central Bank (ECB) Forum on Central Banking held on June 28, the heads of the major central banks from the United Kingdom, the United States, Europe, and Japan made a joint appearance. One notable highlight of the meeting was Federal Reserve Chair Jerome Powell’s emphasis on the potential for the Fed to raise interest rates again in the near future, potentially as early as next month. Powell cited the robust demand for labor as a key factor supporting increased consumer spending, which in turn could sustain ongoing demand. He underscored the pivotal role of the labor market in driving economic growth, noting that recent months have witnessed stronger-than-expected economic growth, a tighter labor market, and higher-than-expected inflation.
When questioned about the Fed’s stance on future interest rate hikes, particularly after the decision to hold rates steady during the current month, Powell indicated the possibility of raising rates in alternate meetings or even in consecutive meetings. He reiterated that most policymakers within the Fed anticipate at least two additional rate hikes to occur within this year, based on their projections.
For most market analysts, Powell’s remarks undoubtedly imply that the Fed may still resume interest rate hikes in July and September, especially given the series of data released on June 27, which indicate that the U.S. economy is performing better than expected. Among these data points, new home sales have reached their fastest pace in over a year, durable goods orders have exceeded expectations, and consumer confidence has reached its highest level since early 2022. Powell stated that these data points indicate the resilience and growth of the economy. Although there is a significant possibility of an economic downturn in the U.S., he does not consider an economic recession to be the most likely outcome.
Furthermore, Powell believes that the situation regarding supply chain disruptions is improving, and overall inflation rates are decreasing, which helps stabilize inflation expectations. However, certain categories of inflation, particularly within the services sector, have not shown significant signs of progress. Therefore, it is expected that the U.S. core inflation rate may not return to the Fed’s target level of 2% until 2025.
Similar to Powell’s remarks, ECB President Christine Lagarde also adopted a hawkish stance during this forum. Lagarde stated that while the ECB has done a lot of work, but there is “more ground to cover”. If the ECB’s baseline projections remain unchanged, Reuters mentioned that Lagarde “cemented expectations for a ninth consecutive rise in euro zone rates in July”. As for September, Lagarde only mentioned that the ECB still relies on data. She emphasized that during a period of rate cuts, no central bank considers where the threshold for inflation lies. Regarding the option of pausing rate hikes, she explicitly stated that it is not something they are currently considering. She reiterated that there is not enough concrete evidence to suggest that potential inflation is stabilizing, let alone declining.
Regarding the current European economy, Lagarde believes that Europe is experiencing “stagnation” rather than a recession. However, she also acknowledged that while the ECB’s baseline projections do not include a recession, it remains a part of the risk. The latest PMI data too makes it difficult for Europe to bring strong hopes of a robust recovery.
In addition, Bank of England (BoE) Governor Andrew Bailey also hinted at the possibility of a prolonged high-interest-rate environment. He stated that the market’s belief that rates will reach their peak around the end of this year and then quickly decline is mistaken. The BoE will set borrowing costs based on evidence, and it is currently focused on the peak of interest rates and how long they can be sustained after reaching that peak. At the same time, Bailey emphasized that the most significant issue facing the UK is core inflation, which is currently two percentage points higher than that of the euro zone and the U.S. He reiterated that the BoE will not request the government to raise the inflation target from its current level of 2%, thereby making it easier for the central bank to fulfill its task of price stability.
However, compared to central banks in Europe and the U.S., the policy direction of the Bank of Japan (BOJ) remains in the accommodative range. BOJ Governor Kazuo Ueda stated at the meeting that if the BOJ is confident that overall inflation will accelerate after a period of slowdown and reach its target in 2024, and there will be sufficient grounds to change monetary policy. This adjustment could potentially occur as early as this year. He sees that the signs of inflation in Japan are still extremely weak. Particularly with the gradual fading impact of rising import prices, the BOJ expects overall inflation to slow down for a certain period of time. Afterward, there is still considerable uncertainty regarding whether Japan’s inflation will pick up again.
Regarding specific inflation indicators, Ueda stated that although the overall inflation rate is above 3%, the BOJ maintains accommodative monetary policy because the underlying inflation rate remains below the target of 2% set by the central bank. He believes that wage growth is also an important determining factor in assessing inflation prospects and added that wages must consistently remain well above 2% for inflation to sustainably reach that level. Therefore, in order to achieve a sustained inflation rate of 2% and sufficient wage growth, “there’s still some distance to go”.
Despite the ongoing global inflation, the central banks of major economies such as the U.S., Europe, the United Kingdom, and Japan have all emphasized the common trend of tightening policies. However, according to researchers at ANBOUND, this year’s statements by central bank governors at the annual meeting undoubtedly reflect the deepening divergence in policy approaches among countries. With persistent inflation pressures and the resilience of the overall U.S. economy, the Fed is bound to lead the way in tightening on the policy axis. Following closely behind are European countries, similarly plagued by inflation concerns. However, due to the escalating risks of recession, both the ECB and the BoE will face more constraints in implementing contractionary policies, likely resulting in a slower and more cautious pace compared to the U.S., potentially widening the policy divergence. On the other end of the axis, China and Japan are moving in the opposite direction, opting for an accommodative path. While Japan has emphasized the possibility of future rate hikes, it has not taken action to tighten policies further like the U.S. and Europe, effectively widening the gap. It is worth noting that while Japan maintains its policy stance, the People’s Bank of China (PBoC) has implemented interest rate cuts in the face of slowing economic recovery and persistently low inflation, aligning itself more with Japan’s approach and increasing the policy divergence.
On a global scale, researchers at ANBOUND have previously pointed out that the changing long-term structural factors are making inflation a pervasive and enduring issue. With central banks of various countries struggling to coordinate synchronously, the problem of inflation becomes even more complex. This not only makes it difficult for central banks to unilaterally implement monetary policies, but also leads to increased global volatility due to policy divergences.
Final analysis conclusion:
From this year’s global central bank annual meeting, the trend of policy divergence among major central banks is deepening. While central banks in Europe and the U.S. continue to implement tightening policies, Japan and China remain at the forefront of policy easing. The implications of this divergence in areas such as capital flows, debt burdens, investment decisions, and foreign trade will have complex effects that need to be considered by central banks of all countries.
Yuan Yujing is a researcher at ANBOUND