Bank of England (BoE) Governor Andrew Bailey, Federal Reserve (Fed) Chair Jerome Powell and European Central Bank (ECB) President Christine Lagarde all said there is a possibility of further rate hikes ahead. Given persistent inflationary pressures and the current economic situation, the central bank bosses clarified their willingness to continue with tight monetary policy.
Speaking at the 2023 ECB Forum on Central Banking, Fed Chairman Jerome Powell, ECB President Christine Lagarde, BoE Governor Andrew Bailey and Bank of Japan (BoJ) Governor Kazuo Ueda responded to questions on a range of topics including policy outlook, inflation, labour market and financial conditions.
What did the central banks say about rate hikes?
The Federal Reserve chose to keep its policy rate steady within the range of 5% to 5.25% after their June policy meeting. However, they suggested there may be a possibility for a 25 basis points (bps) rate increase in July. At the forum Powell said regarding inflation: “I don’t see us getting back to 2% inflation this year or the next; I see us making progress.” He highlighted that inflation has proven to be more persistent than expected but noted how resilient the economy is.
Powell stated that an economic downturn is not the most likely scenario, emphasising that significant disinflation in rents is expected but will take time. He also mentioned the need for further softening in the labour market, acknowledging that the pace of softening is slower than anticipated. Powell expressed that while there is a significant probability of a downturn, it is not the most probable outcome. Furthermore, he noted that more restrictions are anticipated, driven by the labour market. Additionally, Powell mentioned that policy has not been restrictive for a significant duration and that there is a strong majority in favour of two more rate hikes according to the dot plot. He also stated that as the target is approached, the balance of risks becomes more favourable.
European Central Bank
The European Central Bank (ECB) decided to raise its key rates by 25 bps in June, with Christine Lagarde stating that further rate hikes in July are highly probable. At the forum, Lagarde said that “We may have underestimated the resilience of our economies.”
Lagarde voiced her concern about the lack of tangible evidence indicating a decrease in underlying inflation. She mentioned that the second quarter was not favourable for manufacturing, expressing that it does not offer much hope for a strong recovery. Lagarde also commented that there is still ground to cover and if the baseline remains, there is a likelihood of a rate hike in July.
Bank of England
In a surprising move, the Bank of England (BoE) raised its policy rate by 50 bps to 5% due to wage inflation and positive Consumer Price Index (CPI) figures reported in May. In the Q&A session, at the forum, Bailey said that “It would not be the right thing to do to change the inflation target” and added that the “Market doesn’t think we are nearly done at the moment.”
Bailey highlighted that Brexit is not contributing to a robust labour market story. He acknowledged the UK economy’s resilience and stated that the data shows clear signs of persistent inflation. Bailey emphasised the willingness to take necessary measures to reach the inflation target.
Bank of Japan
Lastly, the Bank of Japan (BoJ) maintained its loose policy approach in June, but experts anticipate a potential review of its Yield Curve Control strategy in the upcoming month, which could lead to adjustments later this year. Bank of Japan Governor Kazuo Ueda agreed that “We’re seeing signs of inflation expectations rising but they’re not fully in line with the inflation target.”He added that there is “Still some distance to go in sustainably achieving 2% inflation accompanied by sufficient wage growth.” He said that they expect the economy to expand slightly above potential for some time.
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