Global Central Banks Reach Potential Plateau – Reuters

By Howard Schneider, William Schomberg, and Francesco Canepa

The recent decision by the Bank of England to maintain its policy interest rate highlights a “higher-for-longer” approach shared by the world’s three major central banks. The duration of this strategy will depend on several factors, including inflation trends, the performance of U.S. economic growth, and the ongoing slowdowns in Europe and the UK. Additionally, the sustainability of the increased borrowing costs in the bond markets will also play a crucial role.

Central bank leaders have not announced an end to synchronized rate hikes. Both Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey emphasized the importance of bringing inflation back to the shared target of 2%. They expressed willingness to raise benchmark short-term rates again if inflation continues to exert pressure.

However, the Bank of England’s latest policy meeting minutes hinted at the possibility of interest rates reaching a plateau. They noted that market expectations suggest rates may be at or near their peaks in the UK, the U.S., and the euro area. Policymakers across these regions are describing their monetary policies as restrictive, with investors anticipating that rates will stay elevated at least until mid-next year.

UK officials, like their counterparts at the Fed the day before, observed a rise in market-based interest rates, expected to slow economic activity across major developed economies and contribute to stagnation in the euro zone and the UK. This comes as U.S. growth, which reached an unsustainable and inflationary 4.9% in the third quarter of this year, is also anticipated to cool.

Long-term government bond yields, which respond to central banks’ short-term policy rates but are ultimately set by investors, have notably increased, primarily in the U.S. This shift reflects expectations that global policy rates will remain elevated for an extended period.

Similar sentiments have been expressed by officials from both the Fed and the European Central Bank (ECB), who are downplaying discussions about rate cuts while emphasizing the focus on inflation. The ECB recently held interest rates steady, marking the end of an unprecedented series of ten consecutive hikes. Although inflation in the euro zone has been declining swiftly and the economy has started to shrink, discussions about potential rate cuts are seen as premature.

The Bank of Japan, on the other hand, continues to grapple with a prolonged period of low inflation. Nonetheless, even there, officials are acknowledging a potential end to their ultra-loose monetary policy next year, especially if rising interest rates in other developed economies lead to yen depreciation and higher inflation.

In the immediate future, there is little expectation of assistance from central banks in Frankfurt, London, or Washington regarding interest rate reductions. Policymakers are unwavering in their stance that rate cuts will not be considered until inflation pressures are genuinely alleviated—a process that, even in the U.S. where inflation stands around 3.4%, is thought to take time.

Powell reiterated the commitment to a monetary policy stance that is sufficiently restrictive to steadily bring inflation down to the 2% target, maintaining this approach until there is confidence in controlling inflation. He acknowledged that the risks have become more balanced, suggesting a cautious approach to any future rate increases unless absolutely necessary.

Progress on inflation, he noted, is likely to occur in uneven increments, indicating that achieving stable inflation will require patience and sustained effort.