The world’s three biggest central banks will deliver their first interest rate decisions of the year next week, with markets watching closely for signs of a shift towards less aggressive monetary tightening.
Ratesetters at the Bank of England, US Federal Reserve and European Central Bank will make their decisions on Wednesday and Thursday and are expected to begin to diverge in their battles against inflation after a year of co-ordinated tightening.
The ECB, which was the laggard in raising rates to contain inflation last year, has become the most hawkish of the banks, warning investors that its tightening has further to go.
Inflation in the eurozone has fallen from a double-digit peak, but measures of underlying core inflation are still worrying its ratesetters. Investors are divided over the Bank of England’s next move, with money markets split between another 50 basis-point rise or a smaller increment of 25 points.
Inflation in Britain has consistently run ahead of the UK’s international peers and is likely to have peaked at 11.1 per cent last October.
Central banks are jostling with a shift in the inflationary environment after global energy prices fell back significantly in the past month, pushing down headline inflation rates.
However, less volatile measures of price growth, which strip out elements such as energy, have not come down as much, with wage growth and the cost of services still rising in the UK and eurozone.
This has raised concern that central banks will have to continue raising borrowing costs and keeping them at high levels for longer, even as the economy slows.
Huw Pill, the Bank’s chief economist, warned this month that there was a risk that inflation would remain “persistently” high in the UK.
The ECB has said headline inflation falls will not undermine its determination to get price growth back to a target of about 2 per cent.
Benjamin Nabarro, of Citi Research, said he expected the Bank to stick with another 50 basis-point rise.
The Fed is poised to take a big step back in its aggressive tightening, opting for a 25-point rise on Wednesday, according to money market forecasts.
The US economy is less exposed to moves in global energy prices and inflation has shown signs of responding to a steep climb in interest rates since last March.
