Central bank chiefs warn of more rate hikes ahead

Sintra — Leaders of the world’s top central banks reaffirmed on Wednesday they think further policy tightening will be needed to tame stubbornly high inflation but still believe they can achieve that without triggering outright recessions.

US Federal Reserve chair Jerome Powell kept consecutive interest rate hikes on the table while European Central Bank president Christine Lagarde cemented expectations for a ninth consecutive rise in eurozone rates in July.

Bank of England (BoE) governor Andrew Bailey said he would do what is needed to bring down persistent price growth in the UK, and even the governor of the Bank of Japan (BoJ), Kazuo Ueda, opened the door to one day abandoning its ultra-easy policy.

“Policy hasn’t been restrictive enough for long enough,” Powell told an annual gathering of central bankers hosted by the ECB in the Portuguese mountain resort of Sintra.

“I wouldn’t take moving in consecutive meetings off the table at all,” he said.

Powell said the US labour market in particular needed to soften further to take pressure off prices. While acknowledging a “significant probability” that could lead to a downturn, he said it was “not the most likely case”.

Lagarde said it was possible that the flatlining eurozone economy could slip into an outright recession this year, but stressed that was not the ECB's baseline expectation.

“We still have more ground to cover,” she said of the fight against inflation. “We are not seeing enough tangible evidence of the fact that underlying inflation, particularly domestic prices, are stabilising and moving down.”

The Fed kept rates on hold this month, but markets expect it to raise them again in July or in September before starting to cut them next year.

The ECB is forecast to raise rates in July and September but investors bet it will also turn around and start reducing borrowing costs in 2024 as the economic outlook worsens.

The BoE, which faces the highest inflation rate among the Group of Seven (G7) rich nations, is expected by markets to go further than its peers, taking its bank rate from 5% now to 6.25% by the end of this year.

Bailey said the BoE would “do what is necessary”, but it remained to be seen if market bets would prove correct.

“They’ve got a number of further increases priced in for us,” Bailey added. “My response to that would be: 'Well, we’ll see.'”

He said last week’s surprisingly large 50 basis point rate rise reflected a resilient UK economy and persistent inflation, and that the BoE did not forecast a recession.

Ueda was an outlier, saying the Japanese central bank was keeping monetary policy easy because underlying inflation remained below its 2% target even though the headline measure is above 3%.

But even Ueda entertained the notion that the BoJ could abandon its nearly decade-old policy of zero interest rates if it became convinced that inflation would accelerate into 2024 after a period of moderation.

“If we become reasonably sure the second part will happen, this will be good reason to shift policy,” he said.

Investors have been testing the BoJ’s resolve to keep short-term interest rates at -0.1% and the 10-year bond yield at around zero via its yield curve control policy.

Jennifer McKeown, chief global economist at Capital Economics, said the hawkish tone struck by central bankers in Sintra suggests that rates have not yet peaked and that cuts won’t come for some time.

“But there were some interesting differences in tone,” she said. “Most notably, the ECB and BoE sounded more concerned about wage-price spirals than the Fed, supporting our view that rates in Europe will stay higher for longer than those in the US.”

Reuters