FRANKFURT: The prospect of a new global interest rate-tightening cycle is coming into view as some of the world\u2019s top central banks raise rates and signal more may be needed to tame inflation fuelled by the Iran war.<\/p>\n
Key rates are already much higher than the rock-bottom levels from the last hiking cycle that began in 2022.<\/p>\n
But central bankers are under market pressure to show that they are prepared to raise them further to tame inflation expectations and rein in long-term bond yields at multi-decade highs.<\/p>\n
The Bank of Japan (BoJ) became the latest big central bank to tighten last Friday, following rate increases by the US Federal Reserve (Fed) two days before and the European Central Bank (ECB) in the previous week.<\/p>\n
The Bank of England (BoE) left rates unchanged last week but flagged that inflation pressures could require further action.<\/p>\n
\u201cOur policy phase has changed,\u201d BoJ Governor Kazuo Ueda said as the bank signalled it was prepared to keep pushing up borrowing costs.<\/p>\n
The moves, while formally independent of each other, reflect a shared concern among policymakers that higher oil and gas costs resulting from the Iran war raise the spectre of a new cost-of-living squeeze just a few years after the inflation surge that followed the Covid-19 pandemic.<\/p>\n
The shift marks a stark contrast with the mood barely a month ago, notably after a short-lived pact between the United States and Iran that encouraged investors and policymakers to bet on easing hostilities and a retreat of energy prices.<\/p>\n
The collapse of that agreement \u2013 and the recent Houthi advance along the Red Sea coast marking a new threat to global oil supplies \u2013 have changed the outlook significantly.<\/p>\n
\u201cThe expectation now is that energy prices will stay elevated for longer,\u201d ECB Vice President Boris Vujcic told Reuters in an interview published last Friday.<\/p>\n
\u201cIf inflation remains high through the autumn and affects household incomes and consumer behaviour, that will also have a dampening impact on gross domestic product,\u201d he added, saying that future calls would be made on a \u201cmeeting by meeting\u201d basis.<\/p>\n
Two sources told Reuters last week that further tightening was now on the cards.<\/p>\n
While a hike at the next meeting in October could be in play, a move in December \u2013 which would be the ECB\u2019s third hike this year \u2013 is more likely.<\/p>\n
\u201cThe peak in rates is uncomfortably dependent on events in the Middle East; a hike above 3% cannot be ruled out entirely,\u201d said Greg Fuzesi at JPMorgan.<\/p>\n
Defying the very public demands of US President Donald Trump for a cut in rates, new US central bank chief Kevin Warsh joined his Fed colleagues in a move to raise rates last Wednesday.<\/p>\n
In his post-meeting press conference, he noted he would be \u201chard-pressed to describe broad financial conditions as restrictive\u201d, a formulation that counters the argument that monetary policy is hurting the economy.<\/p>\n
The Fed\u2019s unanimous decision to raise rates, coupled with Warsh\u2019s comments, were seen as laying the groundwork for further tightening and helped reassure investors about the central bank\u2019s commitment to fighting inflation.<\/p>\n
\u201cThe Fed has regained some credibility after raising rates,\u201d said Andrew Lake, chief investment officer at Mirabaud Asset Management.<\/p>\n
Updated quarterly economic projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year.<\/p>\n
\u201cOur inflation problem is not just about energy,\u201d Kansas City Fed president Jeff Schmid said last Friday.<\/p>\n
Compared with the last round, the current global central bank tightening cycle is expected to be far more muted \u2013 chiefly because inflation is not rising as sharply.<\/p>\n
Fed projections released last Wednesday show even the most hawkish US central bankers expect a 4.25%-4.5% policy rate range by the end of 2027, only half a percentage point higher than now, and to drop after that.<\/p>\n
In 2022-2023, the Fed raised the policy rate by 5.25 percentage points, topping it out in the 5.25%-5.5% range.<\/p>\n
Even as it held rates, the BoE said that they might have to go up if the war continues in a commentary interpreted by observers as a clear shift in tone that positions the central bank to follow the Fed and ECB higher.<\/p>\n
\u201cThe longer this goes on, the more difficult this becomes,\u201d said Governor Andrew Bailey, one of three members of the bank\u2019s Monetary Policy Committee who signalled they could back a rise, after he voted to hold at this meeting.<\/p>\n
Some analysts said they expected the BoE to raise rates only once. But financial markets after the meeting were pricing almost four quarter-point hikes over the next year. \u2014 Reuters<\/p>\n","protected":false},"excerpt":{"rendered":"FRANKFURT: The prospect of a new global interest rate-tightening cycle is coming into view as some of the…\n","protected":false},"author":2,"featured_media":630966,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[7309,2605,72,3849,113,8858,1961,61,1095,4751,174008,60],"class_list":["post-630965","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-bank-of-japan","tag-banking","tag-business","tag-central-banks","tag-economy","tag-energy-prices","tag-federal-reserve","tag-ie","tag-inflation","tag-interest-rate","tag-iran-war-impact","tag-ireland"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/630965","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=630965"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/630965\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/630966"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=630965"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=630965"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=630965"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}