A pivotal week in global monetary policy is coming

Investors will be following the outcomes of monetary policy meetings in the United States, the European Union, and Japan this week, from Wednesday to Friday.

Uncertainty over the trajectory of interest rates has recently been common as persistent inflation maintains firm in some places and begins to surrender in others. The Reserve Bank of Australia surprised analysts early last week when it decided to raise interest rates by 25 basis points again, despite a previous month’s surprise boost and a pause at the previous meeting. The Bank of Canada then raised its benchmark rate by 25 basis points four months after its last rate hike, which was thought to be the end of the cycle.

So far, several of the world’s greatest economies have reacted positively to monetary policy tightening, and the potential of a recession appears to be a risk that central banks are prepared to face.

What can we anticipate from the Fed, the ECB, and the Bank of Japan this week? Let’s look at what experts are saying and why these central banks could decide to act one way or the other.

The European Central Bank

The European Central Bank (ECB) raised its benchmark interest rates by 25 basis points at its May meeting, which was seen at the time as a warning that the pace of policy tightening might moderate.

Despite this, borrowing costs have just reached their highest level since July 2008, following seven consecutive rate rises. The primary refinancing operations interest rate increased to 3.75%, while the marginal lending facility rate jumped to 4.00% and the deposit facility rate increased to 3.25%.

Despite the fact that there is still a risk of a recession, the ECB, like many of its peers, has initiated this tightening cycle in an effort to combat high inflation. Furthermore, the central bank announced its decision to stop reinvesting cash received from maturing bonds purchased with the €3.2 trillion APP beginning in July.

According to the most current preliminary data, the Eurozone’s inflation rate fell to 6.1% in May, with the core rate falling slightly to 5.3%. Meanwhile, at the latest meeting’s press conference, ECB President Christine Lagarde stated that the central bank still had work to do and that the series of rate rises would not be stopped anytime soon.

Reuters polled economists, who agreed that the ECB must hike its benchmark interest rate by 25 basis points this week and twice in July before halting for the remainder of the year.

Fed

The Federal Reserve (Fed) raised the target range for the federal funds rate by 25 basis points to 5%-5.25% during its May meeting, marking the 10th rise and raising borrowing costs to their highest level since September 2007.

According to the minutes of the May FOMC meeting, Fed members were unclear how much further policy tightening was necessary in the future, and several emphasised the importance of preserving flexibility. Some speakers emphasised that if the economy progressed in line with current projections, greater policy tightening might not be necessary.

Others, though, felt that if inflation stayed persistently over the 2% objective, greater policy tightening would be required. Finally, the FOMC decided to keep an eye on the implications of fresh data on the economic outlook while they deliberated on the optimal course of monetary policy action.

More than 90% of the 86 economists polled by Reuters from June 2-7 projected that the FOMC will keep the federal funds rate range at 5.00%-5.25% at the end of its meeting this week. The remaining eight experts predict a 25 basis point increase.

BoJ

Back in April, the Bank of Japan unanimously maintained its benchmark short-term interest rate at -0.1% and the yield on its 10-year notes at about 0%. It did, however, amend its policy rate guideline by deleting references to the need to protect against pandemic risks and to keep interest rates at current or lower levels.

During the inaugural meeting of newly appointed Governor Kazuo Ueda, the board also resolved to conduct a complete assessment of the monetary course over a period of around one to one and a half years.

Meanwhile, the central bank trimmed its GDP growth forecast for 2023 from 1.9% in January to 1.2% in a quarterly outlook report, and it reduced its GDP projection for FY 2023 from 1.7% to 1.4%. The CPI level for FY 2023 remained at 3%, however it was boosted to 1.8% from 1.6% the previous year.

Interest rates in Japan have not grown since 2007, when the Bank of Japan raised short-term rates from 0.25% to 0.5%, a decision that was later criticised for postponing the end of price stagnation.