The BoE’s next rate announcement will be on June 16. For this particular central bank, it is not a clear decision to simply barrel ahead with rate hikes to tame four-decade high inflation of 9.0%, even as the CPI will likely head into double-digit territory later this year. There is a far bigger risk of a recession hitting the British economy; in fact, the BoE already warned of this. Consumers and businesses are being hit with not just surging energy and food prices, like the rest of the world. Domestically, utility companies pushed rates up sharply in April after the energy cap was lifted by 54%, and they are expected to do so again in October. Meantime, cell phone fees and rail fares were also raised this year, adding to the pain. Although the BoE has already raised rates for four meetings in a row (25 bps each), the Committee has been torn between 25 and 50 bp moves. Then, at the most recent meeting in May, two members judged that guidance for more rate hikes was "not appropriate", but most felt that "some degree of further tightening" was still appropriate. The fear of hiking into a recession is great, but so is the fear of inflation expectations becoming unanchored. Despite the mixed views among policymakers, the base case scenario will be to continue with 25 bp moves. But, there is a good possibility of a 50 bp hike to 1.50%, in order to strike while the iron is hot. After all, three of the nine members of the MPC were in favour of such a move in May, and inflation has swung higher since then. Still, the BoE is likely very mindful of treading carefully, particularly after the OECD warned that policy should normalize “gradually”.
Where there is now less uncertainty about rate hikes is in the Euro Area. On June 9, the ECB declared its intention to raise rates for the first time in over a decade. After retiring the APP on July 1, the central bank will lift key rates (note the use of the plural, not singular, form of the word) by 25 bps at its July 21 meeting. It plans to do so again at the September meeting and is prepared to do more. Specifically, "If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate". Given that President Lagarde spoke of "upside risks" to inflation, and given the way prices around the world have been going and are headed, a 50 bp'er is very likely at this point. Plus, "some" policymakers wanted a half-point hike in July, but that should be a surprise to no one. But whether all three key rates will be lifted in September remains to be seen. We now look for a 25 bp hike in July, followed by 50 bps in September, and 25 bps in October and December.
The RBA has swung from being a central bank exercising extreme patience, to one that has none left. For the second month in a row, the RBA caught markets by surprise by the size of its rate hike. It raised the cash rate 50 bps to a 3-year high of 0.85% on June 7, the largest move since February 2000, as inflation has "increased significantly" and is expected to continue doing so before heading back towards the 2%-to-3% target next year. Although it views the domestic economy as "resilient" and the labour market as "strong" (which will put pressure on wages), the RBA is concerned about the impact of higher prices on household spending. Like other major central banks, there seems to be a quest to make up for lost time. With this newfound urgency to withdraw the "extraordinary monetary support" put in place during the pandemic, further moves of this size cannot be ruled out. How much and when "will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market". It will also be "paying close attention" to the global outlook, and the war's impact on commodity prices. But in case there was any doubt, the RBA is "committed to doing what is necessary to ensure that inflation in Australia returns to target over time".
- Finally, the BoJ remains moored to the sidelines. There were some questions about how long it can stay there. After all, nationwide inflation has headed higher (core CPI rose above the Bank's 2% target in May). And core CPI in Tokyo, a leading indicator of the broader measure, rose 1.9% y/y in May, matching April's 7-year high. However, this was energy-driven, not due to strong demand. Still, with the JPY cracking a 20-year low of ¥134 thanks to dovish comments from Governor Kuroda this week ("Japan's economy is still on its way to recovery .... monetary tightening is not at all a suitable measure..."), we could see price pressures broadening further. Meantime, no change in the foreseeable future from this central bank.