Do central banks speak with one voice?

Most major central banks around the world have been aggressively raising interest rates since late 2021 in an effort to bring down soaring inflation as a result of the massive monetary and fiscal stimulus introduced to combat the economic fallout from the Covid-19 pandemic.

While not quite in tandem, most central banks have been on the same page until recently, delivering historically large rate hikes.

However, this year we are seeing a gradual different approach as rate hikes have come to the end (or have already come to an end) in their tightening cycles. Central banks are becoming increasingly data dependent as they try to strike a balance between often competing data and are adopting diverging approaches, while the recent banking turmoil has added another level of complexity. Meanwhile, the Bank of Japan has been an exception as it continues to maintain loose monetary policy but the prospects for normalization are growing.

Decision makers certainly have a very difficult job, and communication is often unclear as they consider changing their position. This creates an uncertain monetary policy environment that could continue to be a source of volatility as markets try to guess the next steps.

US Fed (500 bps, started March 2022)

Federal Reserve The United States timidly started the cycle of interest rate hikes in March 2022, but quickly accelerated, becoming more aggressive. This year has started with a slowdown in the pace of monetary policy tightening, with Chairman Powell talking a lot about the ongoing "disinflation process" as price pressures eased. However, as subsequent data pointed to persistent inflation and a strong labor market, it became more hawkish and opened the door to a renewed acceleration in the pace of monetary policy tightening in early March.

Around the same time, a Silicon Valley bank collapsed, sparking concern throughout the financial system. The collapse of Silicon Valley Bank led to more bank failures, such as First Republic Bank, forcing the Fed to adopt a more conservative approach due to the expected contraction in lending as a result of these events.

In March Powell at a press conference, he said that credit terms will be "particularly important" in the future. At that meeting, the Fed raised interest rates again, but made a dovish change to its statement, which opened the door to a pause that would be in line with its own forecasts.

Markets are actually more dovish, predicting interest rate cuts later in the year, but Chairman Powell has dismissed those expectations. However, inflation is still far from the 2% target and the labor market is very tight, with high wages and unemployment at a five-decade low, which requires a restrictive attitude and makes the work of Fed officials very difficult. Even if the Fed keeps rates on hold next month, it's unlikely to be talking about a final rate and more likely to keep optionality.

European Central Bank (375 bp, started in July 2022)

European Central Bank it started raising interest rates later and from a lower point compared to its counterparts, and although it has done so very aggressively, it still has more to do. Following the collapse of the SVB, which also spread to Europe, the ECB took an opposite approach to its US counterpart.

President Lagarde made a clear distinction between financial stability and price stability when she spoke of "no compromises". Following this month's policy meetings, the two central banks continued to move further apart as European policymakers slowed the pace of rate hikes but indicated more moves. Ms Lagarde left no doubt about this, saying that "we have more to go" and that "we are not stopping, it's very clear".

Bank of England (440 bps, started December 2021)

The BoE was the first of the Big Three to raise interest rates already in December 2021. He started with small steps and gradually became more and more aggressive due to the high cost of living.

This month Bank of England raised rates by 0,25% and remained noncommittal on future moves. However, inflation is still very high. Moreover, the UK economy performed less badly than feared and the central bank raised its GDP forecasts.

The above factors suggest there is still room for further trek, but vague guidance creates uncertainty. In his post-decision speech, Governor Baily touted the dependence on data, noting that they were "approaching" a point where they should pause.

Reserve Bank of New Zealand (500bp, started Oct 2021)

RBNZ beat everyone as it launched an extended rate hike cycle in October 2021, two months ahead of its UK counterpart. He was consistently hawkish, leaving no doubt about his priorities.

Prior to its last meeting in April, baseline expectations had been for a smaller rate hike than in the past, but the Reserve Bank of New Zealand stood firm and delivered another 0,5% excessive hike. The Council considered inflation "still too high" and although it has slowed down further since then, it is still far from the target. In addition, wages are at their highest level since 1992 and the unemployment rate is close to historical lows.

Officials were less clear about the next steps this time, noting only that the official cash rate needs to be at a level that will "lower inflation and inflation expectations", a sign that they may be approaching a peak. Based on the bank's latest forecast, officials are projecting a final interest rate of 5,5%, showing there is room for a further increase from the current 5,25%.

Reserve Bank of Australia (375 bp, started May 2022)

Back in April Rebuildables paused the monetary policy tightening path after about a year of successive increases to assess the cumulative effect and incoming data, but not ruling out further moves. After this decision, CPI inflation fell to 7,7%YoY in QXNUMX and the markets expected officials to sit on the sidelines again.

However, that has not happened as the RBA resumed its hike cycle in May, with a quarter percent increase as inflation is "still too high" and the job market is "very tight". Furthermore, they upheld further hikes, noting that "further tightening may be required" to ensure inflation returns to the 2-3% target within a "reasonable timeframe."

Bank of Canada (425 bp, started March 2022)

BoC was the first major central bank to suggest a break earlier in the year and kept its key rate at 4,5% after about a year of increases. The politicians reiterated their position at the last meeting last month.

Inflation readings have allowed them to do so as it has been falling and they expect it to reach 3% by the middle of this year and the 2% target by the end of 2024. However, options remained open, warning that they would remain "ready to raise the key interest rate further" if needed.

Bank of Japan

BoJ is an outlier because it is on the opposite side of the monetary policy spectrum, using negative interest rates, yield curve control, and quantitative and qualitative easing. This is very dovish, although it opened the door to policy normalization with the extension of yield curve control in December 2022, which shocked the markets.

However, this process is unlikely to be quick or straightforward and is likely to be a source of volatility. A further increase in the target yield would seem like a sensible first step, but markets could attack it immediately, so abolition could be considered altogether.

So far, the central bank has not gone further, and the new governor has shown no intention of challenging the status quo. In the first policy decision led by Mr. Ueda, the BoJ made no changes.