Global central bank "Big Four" on the same stage: tightening policy remains mainstream

The European Central Bank's annual forum in the Portuguese town of Sintra ushered in a "real climax" when four central bankers from the US, UK, Europe and Japan were invited to a panel discussion. In the end, the remarks of the world's major central bankers were not surprisingly hawkish. Among them, the US, UK and European central banks sent a signal to continue to raise interest rates, and the Bank of Japan said that a shift to tightening policy was not impossible. But the seemingly similar pace revealed the nature of the accelerated change of the dollar system.

US, UK and Europe: Continue to add!

On June 28, local time, Federal Reserve Chair Powell, European Central Bank President Lagarde, Bank of England Governor Bailey, and Bank of Japan Governor Kazuo Ueda attended the Central Bank Forum panel discussion held by the European Central Bank in Sintra, Portugal.

Since last year, the Federal Reserve, the European Central Bank and the Bank of England have embarked on the most aggressive tightening in decades in an attempt to bring inflation down to its 2 per cent target, with Ms Powell, Ms Lagarde and Ms Bailey all saying they have a long way to go to rein in excessive inflation.

Mr. Powell said rates were likely to rise further in the face of a very strong labour market, but the pace of rate rises was not yet set and depended on the data. "We've come a long way and at the same time think there will be more tightening." Mr. Powell noted that most FOMC members saw the need for two more rate rises this year or more. He added that a tighter-than-expected labour market was driving spending and demand and "really pulling the economy", so while policy was restrictive, it may not have been sufficiently restrictive and not taken long enough to do so.

Lagarde gave no hints of what to do in September, saying there was not enough tangible evidence that inflation was stabilizing and falling; no adjustment to the inflation target was considered; a recession was at risk but not expected; and capital and liquidity were strong in European banks, but not in Switzerland. She argued that the impact of higher interest rates would last longer because more households were taking out fixed-rate mortgages, which are larger in the eurozone than they were about 15 years ago.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management in Switzerland, said Lagarde's tone was quite hawkish, and that the July rate hike sounded like a DingTalk on the board, and the possibility of a pause in rate hikes was slim.

Bailey, for his part, suggested rates could remain at their peak for longer than traders currently expect. Bailey also pointed out that the Bank of England's rate decisions are "largely evidence-driven". Inflation has been more persistent than expected as higher wages have tightened the labour market and the economy has become more resilient. But he denied that the tight labour market was being driven by Brexit, attributing it to measures against the COVID-19 pandemic.

Analysts say BoE policymakers are most concerned about sticky wage growth and are also disappointed by core commodity price inflation, which remains high despite a recent sharp fall in UK manufacturing output price inflation. The BoE blames wage growth, which appears likely to be the reason for last week's 50 basis point rate rise, with the central bank likely to take a more aggressive stance until wage growth shows signs of slowing.

"Out of step"

The speech, Mr. Ueda's first at the ECB Central Bank Forum since becoming governor of the Bank of Japan, was still different from the three major central banks in the US, the UK and Europe. He stressed that Japan was keeping interest rates on hold because underlying inflation remained below 2 per cent. Even so, he outlined how things could change if the BoJ became more confident of achieving 2 per cent price rises next year.

After decades of near-stagnation, Japan's wage and price growth is picking up, Mr. Ueda said, leading officials to consider the possibility of abandoning ultra-loose monetary policy "if we are fairly certain that headline inflation will pick up in 2024, then that would be a good reason to change policy".

Analysts said Mr. Ueda's latest remarks were in effect a hint that the BoJ might change policy this year, not necessarily until 2024 to see changes in consumer price data, but that growing confidence in the outlook could drive policy adjustments.

The current "out-of-step" of the four central banks also raises questions about policy co-ordination. Mr. Bailey said it was clear that central bankers did not say to each other "what you should do, what I should do", after all, each set policy for its own region. However, governors do communicate frequently, especially in the face of common shocks in the near future.

Economists at Bloomberg Economics said: "The European Central Bank and the Federal Reserve sound as if they are approaching peak interest rates and starting to discuss the duration of end point rates, while the Bank of England is still watching how high rates will go. Finally, the Bank of Japan does not appear to be taking any action anytime soon."

The dollar system is accelerating change

Before the current round of Federal Reserve interest rate hikes, the world's major central banks were generally guided by the Federal Reserve. According to Chen Jia, an independent international strategy researcher, in the past, as long as the Federal Reserve raised or cut interest rates, its force and direction were replicated one-to-one by the European Central Bank and the Bank of Japan. The financial and academic circles called this phenomenon the "one-hit (turn) three strikes (US, European and Japanese central banks) " of global central banks.

"But during the three years of the epidemic, the Federal Reserve adopted a large-scale easing policy, resulting in the prevalence of negative real interest rates in the European, American and Japanese markets. After that, with high inflation in the United States, the Federal Reserve had no choice but to change course and start raising interest rates in an all-round way. However, the effect of the interest rate hike path for more than a year was not satisfactory. It was not until last month that the soaring momentum of the US core inflation rate was really suppressed. The Federal Reserve stopped the interest rate hike in due course. But with the recent surge in the number of new US real estate projects, the global market has begun to worry that the Federal Reserve will restart the interest rate hike channel for the second time."

Such a repeated Fed makes it impossible for other central banks to follow suit. The Federal Reserve, which once responded to three calls and struck three strikes at global central banks, may find it difficult to deeply affect the two major central banks in Europe and Japan this time - which means that there is no de facto unified tone in the global central bank system.

Chen Jia pointed out that essentially this issue involves the accelerated change of the dollar system and the reform of the old international monetary system. Europe, which is mired in stagflation, has weaker economic fundamental growth expectations than the United States, and its inflation momentum has not been effectively curbed. Even if the Federal Reserve continues to raise interest rates, it may be difficult for the European Central Bank to prohibit it. Judging from Lagarde's recent speech, the European Central Bank's battle to curb inflation is far from over, and the European Central Bank's interest rate hike in July is a high probability event.

"In Japan, which was obsessed with Abenomics, its economy was deeply trapped in the double helix trap of trade and finance in the early stage, and the currency depreciation and trade deficit once complemented each other." Chen Jia believes that in the months after the change of command of the Bank of Japan, the Japanese economy regained confidence and capital markets began to pick up. Especially with the support of long-term capital in the United States, American strategic investors including Buffett began to up the ante Japanese economy. The stimulus effect of its monetary policy gradually became apparent. Even if the Federal Reserve continues to raise interest rates in the future, the Bank of Japan will follow its own pace, and it is highly likely that it will not follow the pace of the Federal Reserve's interest rate hikes.