In the last couple of weeks, the world’s major central banks have met and taken important decisions or made crucial announcements regarding their future decisions. Going in chronological order, the European Central Bank (ECB) in mid-July decided to keep its key policy rates unchanged, after the 25-bps cut it deliberated in June. This was due to the fact that macroeconomic conditions did not warrant a back-to-back reduction in policy rates, considering that economic activity has actually picked up recently, while inflation has remained above the ECB’s target. Nonetheless, during the press conference, President Christine Lagarde said that the possibility of an additional measure of monetary easing (another 25bps cut) in September is “wide open”, and we expect the Eurozone’s central bank to cut rates on that occasion.
Last week, the US Federal Reserve, the UK’s Bank of England, and the Bank of Japan met for their last meetings before the summer break, all making important decisions and announcements.
The Federal Reserve left its policy stance unchanged, as inflation remains above the central bank’s target, and economic activity, including job creation, remains solid. However, during the press conference, Chair Jay Powell said that the FOMC has increased in confidence that inflation will durably return to target after a series of positive readings in Q2, which offset the negative readings (i.e. rises) recorded in Q1. On the back of that, Powell said that if the economy continues to perform in line with current developments, the Fed would be prepared to finally cut its benchmark Fed funds rate by a quarter of a point in September, thus marking the end of one of the steepest tightening cycles in recent history.
The Bank of England left the market to wonder until the very last minutes about its intention, with market participants split in half between those (including us) who expected the BoE to cut rates in August and those who thought the Bank would wait until September. Eventually, the Bank decided, with a razor-thin majority of 5-4, to cut rates in August, with Chief Economist Huw Pill joining the “usual” dissenters, recording a dissent compared to Governor Andrew Bailey, and his boss Claire Lombardelli, the newly-appointed Deputy Governor for Monetary Affairs. In September, the Bank of England will release its plan for its Quantitative Tightening (QT) program for the September 2024-August 2025 period.
Finally, the Bank of Japan held its meeting at the end of July, after announcing in June that it would reduce the pace of its asset purchases, without specifying the parameters for such a move. So, at its July meeting the BoJ announced that it would reduce the purchase of JGBs by about a half over time, from JPY 6tn yen a month to around JPY 3tn yen. Alongside this announced decision, the BoJ decided to increase its policy rate by about 15bps to “around 25%”, a second increase after that decided in March. This signals increased confidence on the part of the BoJ that inflation will remain durably above the 2% target, after years of dis-inflation or deflation.
Overall, this set of decisions or announcements signals the will by the world’s major central banks to put their respective houses in order before the summer break, to be ready to resume their activities in the autumn with a bang.
