Most central banks have turned more hawkish amid tight labor markets and sticky services inflation, which remains stubbornly higher than their previously projected levels. Rhetoric coming out of most banks signaled that further tightening of policy rates will be necessary as economies are not slowing as expected. Across many developed nations, central bank monetary tightening has yet to have the full desired effect on inflation. Unemployment levels remain near all-time lows, pushing wages higher and frustrating the efforts of these banks. We still see policy rates rising in the United States and across Europe as the banks’ focus on bringing inflation down trumps concerns of slowing economic growth levels.
The month of June saw many central banks increase their policy rates, with the Bank of England and Norges Bank delivering outsized 50-basis point (bp) hikes, while the Swedish and Swiss banks moved higher by 25 bps. The European Central Bank (ECB) continued their path of policy tightening, increasing rates by 25 bps, and signaled that they are not currently considering a pause in rate hikes and another increase in rates is likely in July.
Although the US Federal Reserve (Fed) chose not to increase their fed funds rate in June, their updated Summary of Economic Projections showed the median expectation is for an additional two rate hikes by the end of the year. Resilient consumer spending and a very tight labor market continued to work against the Fed’s push to slow the economy down and bring the job market back to equilibrium. The Bank of Canada followed suit in pausing but signaled that they are predisposed to further tightening if the inflation picture does not improve.
The Bank of Japan (BoJ) remained an outlier, keeping both rates and their yield curve control (YCC) framework in place. Although there has been an uptick in wages and inflation, the BoJ insists that it is yet to be convinced that rising inflation is an issue. We anticipate that the bank will need to tighten policy on the edges as the costs to policy inaction increase. Fighting against slowing domestic growth, the People’s Bank of China (PBoC) cut their policy rate by 10 bps with additional cuts likely in the near term.
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