Many of the major central banks have decided to hold interest rates steady, but few officials are yet declaring victory over inflation.
Eurozone central bank governors enjoyed a night out dancing to the theme song from Zorba the Greek last week after they met in Athens and unanimously agreed to stop raising interest rates for the first time in 15 months.
The halt in the rate-rising cycle has sparked a flurry of optimism among bond market investors that leading economies are close to vanquishing the inflationary upsurge, after consumer price growth more than halved from its peak levels in economies including the US and euro area. It also reflects genuine uncertainty over whether the recent data marks a conclusive turning point, especially given central banks’ past forecasting failures and fears that a volatile geopolitical environment could throw up fresh price shocks.Joseph Gagnon, a former senior staffer at the Fed who is now at the Peterson Institute for International Economics, says central banks are now at an “inflection point” and that this is a point of minimum — rather than maximum — confidence in the outlook.
Bank of England governor Andrew Bailey insists further increases in rates remain on the table despite signs that consumer price inflation is subsiding.In the US, that brutal set of rate rises has helped curb CPI inflation to 3.7 per cent, far below a peak that neared 10 per cent. Yet the Fed is still dealing with a surprisingly effervescent economy that recorded annualised growth of 4.9 per cent in the most recent quarter.
Powell insisted that the Fed was not even entertaining the idea of when to cut rates. But increases in long-term rates over recent weeks, driven by factors including concern about hefty government borrowing, have helped to tighten financial conditions significantly, bolstering the case that the Fed can stand still for the time being.
ECB board member Isabel Schnabel warned in a speech on Thursday that “the last mile” of the disinflation process “will be more uncertain, slower and bumpier” and risked being destabilised by “supply-side shocks” such as the Israel-Hamas conflict.Nevertheless, market discussion now centres not on whether further hikes lie ahead, but rather how soon the ECB’s first cut will come. Economists expect its rate-setters to wait for clear evidence that inflation has been tamed before cutting rates.
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