Nov 2 (Reuters) – The Bank of England’s decision to hold
its policy interest rate steady on Thursday puts the world’s
three major central banks in a “higher-for-longer” holding
pattern the length of which will hinge on how inflation behaves,
the strength of U.S. growth and the depth of developing
slowdowns in Europe and the UK, and whether bond markets sustain
the higher borrowing costs that have attracted notice on both
sides of the Atlantic.
No central bankers have declared the era of synchronized
rate hikes over, and both Fed Chair Jerome Powell on Wednesday
and Bank of England Governor Andrew Bailey on Thursday indicated
their priority remained returning inflation to the shared 2%
target, and that they were open to raising their benchmark
short-term rates again if price pressures prove more persistent.
But the minutes of the Bank of England’s latest policy
meeting nodded to a possible plateau.
“Market expectations for the paths of policy rates suggested
that interest rates were at or near their peaks in the United
Kingdom, the United States and the euro area,” the minutes
stated. “Monetary policymakers in each jurisdiction had
described the stance of monetary policy as restrictive,” with
investors aligning behind the idea that rates will remain high
at least into the middle of next year.
UK policymakers took a cue, as did those at the Fed the day
before, from a rise in market-based interest rates that is
expected to put a drag on economic activity throughout the major
developed economies, further slowing growth in the euro zone and
Great Britain that is already drifting below zero, and cooling
U.S. growth that in the third quarter of this year was running
at a likely unsustainable and inflationary 4.9%.
Long-term government bond yields, which are influenced by
central banks’ short-term policy rates but ultimately set by
investors, have “risen materially, with the largest moves seen
in the United States,” the BOE’s Monetary Policy Committee noted
in its minutes. “In part, that was likely to reflect market
expectations that global policy rates would remain higher for
longer during the current cycle.”
Both the Fed and ECB officials have set a similar tone,
discounting talk of rate cuts to keep the focus on inflation.
The European Central Bank left interest rates unchanged as
expected last week, ending an unprecedented streak of 10
consecutive rate hikes. But talk of rate cuts was premature,
officials said, even though data showed euro zone inflation was
falling fast and the economy had begun contracting. Combined
with a collapse in credit creation, this meant the ECB had
almost certainly finished raising rates, which are at record
highs.
The Bank of Japan remains the outlier, still trying to put
decades of too-low inflation behind it. But even officials there
see a possible end to their easy money stance next year, with
one risk being that they are forced to act faster if higher
interest rates in other developed economies weaken the yen and
push Japanese inflation higher.
For now, they’ll be little chance of help on that front from
Frankfurt, London, or Washington, where policymakers uniformly
say rate cuts won’t be on the table until price pressures are
truly contained, a process that even in the U.S., where
inflation at around 3.4% is closest to target, is expected to
drag on.
“We are committed to achieving a stance of monetary policy
that is sufficiently restrictive, to bring inflation sustainably
down to 2% over time, and to keeping policy restrictive until we
are confident that inflation is on the path to that objective,”
Powell said on Wednesday.
“The risks have gotten more two-sided,” Powell said, an
argument for avoiding any further rate increases unless it is
unavoidable, but it may take a while, still, to declare victory.
Progress on inflation “is probably going to come in lumps,”
Powell said. “It does take some time.”
(Reporting by Howard Schneider; Editing by Andrea Ricci)
