Thoughts

March 17, 2025 | 15:13

Monetary Policy: Variety is the Spice of Life

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

It is not just the Fed that is on deck next week. A few other central banks are also making announcements: one is expected to stay put, another is expected to hike modestly; and another is expected to hike… a lot.

The BoE will likely stay the course. Although there have been very vocal complaints from businesses about the negative impact that the Autumn Budget is having on their hiring and spending plans, the impact has yet to truly show up in the data. The economy, after contracting in Q3, ended the year on a steadier footing (+0.4% annualized), but 2025 is not starting off that way. Real GDP unexpectedly slipped 0.1% in January, the first setback since October, but smoothing out the monthly wiggles shows a 0.2% gain over the past three months. All of the weakness at the beginning of the year was in production (-0.9%) while the services sector softened the blow, rising 0.1% or 0.4% on a 3-month moving average basis. Meantime, inflation is still well above target: headline CPI is at a 10-month high of 3%, and core CPI is at a 9-month high of 3.7%. Services inflation is hovering at 5%, which is below the BoE’s estimate but still too high. With that backdrop, the BoE will likely wait for Chancellor Reeves’ Spring Statement before it eases again. And with the next meeting not until May 8, it will give the central bank plenty of time to assess what comes from the U.S. April 2nd tariff announcement.

The BoJ, meantime, is expected to hike again. The economy grew 2.2% annualized in Q4, which is better than what we’ve seen in Europe but behind that of the U.S. and Canada. Core CPI remains firmly above target at a 19-month high of 3.2% y/y and that, along with a still-weak yen (despite accusations from President Trump that Japan is purposely keeping its currency weak), is enough reason to continue hiking. Plus, it is encouraging that some Board members were reportedly reluctant to step in and intervene in the bond market this week, despite the JGB selloff which pushed 10-year yields to as high as 1.57%, the highest in nearly 17 years. This restraint shows that the Bank has firm conviction to normalize monetary policy.

Finally, Brazil had signalled back in January that it would follow up that 100 bp hike to 13.25% with “another adjustment of the same magnitude” in March, “if the scenario evolves as expected”. Well, given that inflation jumped 1.3% in February alone, the largest monthly increase in three years, that should be enough reason for another large rate hike.