Big central banks unite under the mantra “higher rates for longer”

The central banks of the world’s major economies warned that they will keep interest rates as high as necessary to contain the inflationeven though they were at the height of two years of unprecedented tightening of global monetary policy.

The mantra “higher rates for longer” It is now the official position of the United States Federal Reserve, the European Central Bank and the Bank of England, and it was echoed by monetary policy makers from Oslo to Taipei.

For central bankers – first reprimanded for being late in detecting the post-pandemic spike in inflation and then admonished for exaggerating their response – the prize of returning the global economy to stable prices without recession is now in sight.

Their task is to convince financial markets not to undo their work by betting on early rate cuts, and to be alert to new risks such as rising oil prices, while waiting for governments to help with budgets that do not yet feed plus inflation.

“We will have to keep rates high enough for long enough to make sure we get the job done”Bank of England Governor Andrew Bailey said on Thursday after the bank narrowly decided to keep its main rate at 5.25%.

Fed officials delivered a similar message on Wednesday. They maintained the reference rate at 5.25%-5.5%but they stressed that they will continue to be tough in a fight against inflation that they now see lasting until 2026.

In Europe, the president of the ECB, Christine Lagarde, insisted last week that further increases in the euro zone, made up of 20 countries, could not be ruled out. The central banks of Norway and Sweden indicated on Thursday that they could raise rates again and even the Swiss National Bank maintained the outlook for further increases despite inflation remaining at a comfortable level. 1.6%.

The Central Bank of Turkey confirmed its bullish turn, while its Taiwanese counterpart indicated that it will maintain its restrictive policy. South Africa’s Reserve Bank left its policy rate steady, but officials said risks to the inflation outlook remain.

Among the most significant exceptions are the Bank of Japan, which is expected to keep rates negative at its meeting on Friday, and the People’s Bank of China, whose improved economic outlook allowed it to keep its rates on hold earlier in the week.

Despite gradually cooling, inflation in most major economies remains well above the target 2% that central banks consider healthy. In August it stood at 3.7% in the United States and in 5.2% in the euro zone.

Yet for all the tough rhetoric, investors remain skeptical that central banks will stay the course, amid doubts about the strength of the Chinese economy and geopolitical concerns, from the Ukraine war to rivalry. between the United States and China.

“By this time next year, we predict that 21 of the world’s 30 major central banks will be cutting interest rates.”Capital Economics said in a commentary titled “A turning point for global monetary policy.”

In any case, the prospect of global rates coming very close to peaking will come as a huge relief to emerging economies, which bear a heavy debt service burden.

With both the United States and Europe having avoided the once-predicted recession, the tantalizing prospect of a “soft landing” for the global economy is once again in sight, thanks in large part to unusually buoyant labor markets.

The monetary authorities admit that they have not yet agreed on the explanation. Some suggest that companies are eager to avoid a repeat of the skilled labor shortages they suffered when the global economy took off in 2021 following COVID lockdowns, so they are “accumulating labor.”

That unresolved puzzle means opinion is divided as to what the true underlying strength of the global economy is, and whether it can withstand a sustained period of high rates without global demand being severely damaged.

Source: Reuters