Three major central banks held their policy meetings last week. The FOMC of the Federal Reserve met on Tuesday, and on Wednesday it revealed the decision (which had largely been anticipated by the market) to “skip” the June meeting as part of its tightening cycle. During the press conference, Chairman Powell said he did not want to elaborate on the difference between a “skip” (which could be considered a one-off event) and a “pause” (which could be a prelude to a more prolonged period of no action).
But with some key inflation indicators, such as the PCE and core PCE indices which are the Fed’s preferred gauges of inflation, having recently risen, it is hard for the FOMC to declare victory, so long as inflation remains more than double the target level. For this reason, the Fed has indicated, in its quarterly projections, that the FOMC expects two more 25bps increases to be deliberated in H2 2023. That will begin in July, which will be a “live” meeting, suggesting that a rate increase is more likely than not.
The Governing Council of the ECB meanwhile met on Thursday and announced, through its President Madame Lagarde, an increase in all its policy rates by 25bps. More importantly the ECB announced during the press conference that it is very likely that rates will be increased further in July, and possibly in coming months, as there is still “ground to cover,” given that inflation remains persistently high. The ECB is doubling its tightening efforts by completely stopping reinvesting the proceeds of its maturing bonds under the APP facility.
The day after the ECB came the BoJ’s turn. The BoJ has been the outlier of this tightening cycle, having maintained its policy rates – and all the other elements of its policy stance – at an unchanged level throughout this period. It did so in spite of headline and core inflation now being above the bank’s 2% target, for the first time in a very long time. Clearly, Kazuo Ueda, the new governor of the central bank, has not been able to form a majority within the MPC to change the BoJ’s stance.
This week, it will be the Bank of England that has to decide whether or not to raise rates. The MPC will meet on Wednesday, and on Thursday it will likely deliver yet another 25bps increase, which will bring Bank Rate to 4.75%, a level not seen since prior the global financial crisis. More than the decision, which is widely expected, the market will focus on the language accompanying it, to see how many rate increases are still in the pipeline.
All of the above suggests that rate increases are likely not over yet in many jurisdictions. Inflation proves to be stickier than initially anticipated. And inflation is more persistent than had been anticipated because of the various structural factors that we have been discussing in several pieces of analysis.
