Global central banks mark a possible plateau

By Howard Schneider, William Schomberg and Francesco Canepa

(Reuters) – The Bank of England’s decision to hold its policy interest rate steady on Thursday puts the world’s three major central banks in a “higher-for-longer” holding pattern the length of which will hinge on how inflation behaves, the strength of U.S. growth and the depth of developing slowdowns in Europe and the UK, and whether bond markets sustain the higher borrowing costs that have attracted notice on both sides of the Atlantic.

No central bankers have declared the era of synchronized rate hikes over, and both Fed Chair Jerome Powell on Wednesday and Bank of England Governor Andrew Bailey on Thursday indicated their priority remained returning inflation to the shared 2% target, and that they were open to raising their benchmark short-term rates again if price pressures prove more persistent.

But the minutes of the Bank of England’s latest policy meeting nodded to a possible plateau.

“Market expectations for the paths of policy rates suggested that interest rates were at or near their peaks in the United Kingdom, the United States and the euro area,” the minutes stated. “Monetary policymakers in each jurisdiction had described the stance of monetary policy as restrictive,” with investors aligning behind the idea that rates will remain high at least into the middle of next year.

UK policymakers took a cue, as did those at the Fed the day before, from a rise in market-based interest rates that is expected to put a drag on economic activity throughout the major developed economies, further slowing growth in the euro zone and Great Britain that is already drifting below zero, and cooling U.S. growth that in the third quarter of this year was running at a likely unsustainable and inflationary 4.9%.

Long-term government bond yields, which are influenced by central banks’ short-term policy rates but ultimately set by investors, have “risen materially, with the largest moves seen in the United States,” the BOE’s Monetary Policy Committee noted in its minutes. “In part, that was likely to reflect market expectations that global policy rates would remain higher for longer during the current cycle.” 

Both the Fed and ECB officials have set a similar tone, discounting talk of rate cuts to keep the focus on inflation. 

The European Central Bank left interest rates unchanged as expected last week, ending an unprecedented streak of 10 consecutive rate hikes. But talk of rate cuts was premature, officials said, even though data showed euro zone inflation was falling fast and the economy had begun contracting. Combined with a collapse in credit creation, this meant the ECB had almost certainly finished raising rates, which are at record highs.

The Bank of Japan remains the outlier, still trying to put decades of too-low inflation behind it. But even officials there see a possible end to their easy money stance next year, with one risk being that they are forced to act faster if higher interest rates in other developed economies weaken the yen and push Japanese inflation higher. 

For now, they’ll be little chance of help on that front from Frankfurt, London, or Washington, where policymakers uniformly say rate cuts won’t be on the table until price pressures are truly contained, a process that even in the U.S., where inflation at around 3.4% is closest to target, is expected to drag on.

“We are committed to achieving a stance of monetary policy that is sufficiently restrictive, to bring inflation sustainably down to 2% over time, and to keeping policy restrictive until we are confident that inflation is on the path to that objective,” Powell said on Wednesday.

“The risks have gotten more two-sided,” Powell said, an argument for avoiding any further rate increases unless it is unavoidable, but it may take a while, still, to declare victory.

Progress on inflation “is probably going to come in lumps,” Powell said. “It does take some time.”

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