The developed global central banks have been in synchronization for the past four years. However, this synchronization seems to be ending as domestic factors overshadow the global trends in impacting the price dynamics.
Outlooks of Global Central Banks
New Zealand might be the one to take the first step towards breaking away from the global central banks’ synchronization. According to the ANZ Bank economists, an interest rate hike is possible as soon as 28 February, which is a departure from the current policy synchronization.
Similarly, sticky inflation and a robust labor market in the United States have caused traders to support the Federal Reserve’s decision against near-term easing.
Conversely, price pressures are easing faster than expected in the euro area, making a case for earlier rate cut arguments.
Traders anticipate a potential interest rate cut by the Swiss National Bank as soon as next month.
The United Kingdom is facing tough times because of its economic downturn and high inflation, with the Bank of England probably facing the toughest scenario.
According to the forecasts released by the International Monetary Fund, there seems to be an improved outlook for the US and worsening prospects for the eurozone. Figures are bleak for the UK.
In Australia, the Reserve Bank Governor’s tone at the recent meeting hints at the possibility of a further increase in interest rates.
Japan, which has always stood out with its quest to defeat deflation, might take a different route this time by introducing its first interest-rate hike since 2007 in the coming months.
Looking Ahead
The strategists of JPMorgan advise investors to navigate this US-Europe growth divide by favoring US assets. They also expect a more hawkish stance from the Bank of Canada and Reserve Bank of Australia.
A year from now, bond traders are forecasting that there might be varying benchmark rates across regions. While the US is expected to witness a decline of approximately 100 basis points, Europe may experience a sharper decrease of around 120 points. In contrast, Australia’s benchmark rates are predicted to decrease by a modest 40 points, while Japan could see an increase of roughly 30 points compared to current levels.
There have been concerns raised by the strategists at Citigroup Inc., who believe that there is a possibility that rate increases can follow a brief easing cycle in the US. This might pose risks to traders who may need to take different actions against the volatility in the market.
The ECB is being cautious of a quick U-turn in monetary policy, as they cannot underestimate inflation.
Pierre-Olivier Gourinchas, chief economist of IMF, has said there is a huge difference in the challenges faced by the US and the European countries. He says that inflation in the US is more demand-driven. Therefore, the banks should focus on avoiding risks usually associated with premature easing. Subsequently, the inflation on the euro side has been affected greatly by the price rise. Therefore, he emphasizes the need to manage the risks associated with delaying interest rate cuts too much.
There might be some uniformity in monetary policies due to trends in technology, energy, foreign exchange dynamics, etc. However, domestic factors like population growth rates, energy import dependence, and housing dynamics will ultimately result in the divergence of the future monetary policies of different countries.
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