Central banks around the world are in a tough spot, being pressured by inflation and reviewing their monetary policies as the recovery from the pandemic still moves forward unevenly. The equilibrium between supporting economic growth and holding down inflation has become more and more difficult hence the policymakers think of more severe tightening measures in the case of some regions but keeping the others with highly accommodative policies.
In the meeting on Wednesday of the Federal Reserve, a tone was set to show the essence of becoming more hawkish through the alarm of inflation. Fed Chair Jerome Powell stated the importance of flexibility in the central bank’s approach to interest rates, adding that if inflation continues to outpace expectations, the speed of the rate hikes could be faster. The Fed’s economic revised estimates tell that a total of four rate hikes could happen in 2025, up from the previous forecast of three.
Across the continent in the Eurozone, The European Central Bank (ECB) is facing multiple economic problems and is in the process of attempting to solve them while the member states are experiencing diverse economic conditions. On the one hand, some countries show a favorable economic picture with growth and inflation, while others still haven’t recovered yet. They continue to have slow economic growth and high unemployment rates. ECB President Christine Lagarde has resounded the bank’s commitment to favorable financing conditions with an eye on the inflationary episodes.
Meanwhile, the Bank of England has chosen to be more aggressive, already implementing its third rate hike in response to the strong growth in the UK. The BoE Monetary Policy Committee voted 7-2 to raise the bank rate by 25 bp to 1.25%, the highest since 2009. Governor Andrew Bailey insisted it was vital to act promptly to nip in the bud the expectation of increasing prices in the minds of the people, while admitting the downside potential to the economic growth.
In the far East, the People’s Bank of China (PBOC) has kept a comparatively easy situation, with main concerns in assisting the economic recovery of the country and the careful control of financial risks. The central bank has used specific strategies to bring down lending to small and medium-sized businesses while managing liquidity in the money market in a prudent manner. However, the general statement of some analysts suggests that the central bank can come to a conclusion to tighten measures in the following months if the inflation-induced pressures endure.
In contrast to other big central banks of the world, the Bank of Japan (BoJ) remains an exception as it keeps an ultra-loose monetary policy despite the high global inflation rates. Governor Haruhiko Kuroda restated the stance of the BoJ that rests on the yield curve control policy and purchase of a large chunk of the assets pointing to the proposition that the peculiarities of Japan’s inflation are quite different from other front-rank economies.
The central banks in the emerging markets are in the face of really complicated challenges as they are heading towards the worldwide movement of monetary policy tightening. A lot of them have already begun the process of sounding the alarm by hiking interest rates to contain the inflation economic problem and the speculation of potential capital outflows is put on the margin. The Central Bank of Brazil is a good example of the last, which has achieved the most of the world tightening cycle, raising its rate by 975 bps since March 2021.
There is a divergence between the major economies in their approaches to the monetary policy, and this creates significant concern in the global financial market and capital flows. The chance of higher interest rates in the United States is one of the factors that contribute to the appreciation of the dollar, placing the emerging market currencies under stress, hence causing inflation pressures in these economies.
Central bank policies increasingly maneuver its landscape. For traders, monitoring policy statements and economic data for possible to announce upcoming monetary policy turns is an assignment of great vigilance. But the potential for policy mistakes or unpronounced economic occurrences adds this uncertainty a second, third, and fourth time so that the already definitely unstable global market security is further underscored, reiterating the necessity of careful risk management and diversification of strategies for the investors.
Next year, banking sector interworking and mutual exchanges will become the key to the global financial stability of the world and a rescue bearer of a sustainable economic recovery. In other news, August’s Jackson Hole Economic Symposium will be the chance for the central bankers to open up to the world and get into the nitty-gritty of all the challenges, some of which are unique to the period after the pandemic.
