- The European Central Bank hiked interest rates on Thursday, following a pause by the Federal Reserve.
- Days before that, China’s central bank cut its key medium-term lending rates, while Japan’s central bank left its ultra-loose policy unchanged.
- “Given the different stages in which jurisdictions are in the cycle, more nuanced decisions will be made,” Constantin Veit, portfolio manager at PIMCO, told CNBC’s Street Science Europe on Friday.
Dollar, Yuan, Yen and Euro notes.
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From hawkish pauses to rate hikes and dovish tones, the world’s biggest central banks struck a very different tone on monetary policy last week.
The European Central Bank raised rates on Thursday and surprised markets with a bleak inflation outlook, leading investors to yet more rate hikes in the euro zone.
This follows the Federal Reserve meeting, where the central bank decided to put rate hikes on hold. Days before that, China’s central bank cut its key medium-term lending rates to stimulate the economy. In Japan, where inflation remains above target, the central bank has not changed its ultra-loose policy.
“Taking all these different approaches together, not only does it appear that there is a new difference in the right approach to monetary policy, but it also shows that the global economy is no longer integrated, but rather a set of very different cycles,” said Carsten Bresky. ING Germany’s global head of macro told CNBC via email.
In Europe, inflation in the euro-denominated bloc has eased but remains above the ECB target. The same is true in the UK, where the Bank of England is expected to raise rates after very strong labor data on Thursday.
The central bank, which began its hiking cycle before the ECB, decided to take a break in June – but said it would expect two more rate hikes later this year, meaning its hiking cycle is not yet complete.
However, the picture is different in Asia. China’s economic recovery is stalling, with domestic and foreign demand falling and policymakers ramping up support measures in an effort to revive activity.
In Japan – which has struggled with a deflationary environment for years – the central bank said it expects inflation to ease later this year and not to normalize policy yet.
“Every central bank [tries] To address its own economy, it includes considerations for changes in financial conditions imposed from abroad,” Erik Nielsen, UniCredit’s group chief economic advisor, said by email.
The euro hit a 15-year high against the Japanese yen on Friday, according to Reuters, on the back of mixed monetary policy decisions. The euro also broke above the $1.09 level as investors digested the ECB’s hawkish tone last Thursday.
In bond markets, German 2-year bond yields hit a 3-month high on Friday, on expectations that the ECB will continue its approach in the short term.
“We’re starting to see this variation. More nuanced decisions have to be made,” PIMCO portfolio manager Constantin Weed told CNBC’s Street Signs Europe on Friday.
“It will really create opportunities for investors.”
ECB President Christine Lagarde was asked during a press conference to compare her board’s decision to raise rates and the Federal Reserve’s decision to suspend.
“We’re not thinking about pausing,” he said. “Are we done? Are we done traveling? No, we’re not [the] target,” he said, hinting at at least one more possible rate hike in July.
For some economists, it is only a matter of time before the ECB finds itself in the same position as a central bank.
“The Fed leads the ECB [as] The US economy has led the Eurozone economy for some quarters. This means that after the September meeting, the ECB will also face a debate on whether to suspend or not,” Bresky said.