New York: Three of the world’s largest central banks moved interest rates in different directions this week as a long-awaited, but potentially short-lived, divergence in monetary policies deepens.
The Bank of Japan (BoJ) kicked off the action on Wednesday by unexpectedly hiking as governor Kazuo Ueda pressed ahead with his push to lift his benchmark clearly away from zero.
Then came the US Federal Reserve’s (Fed) decision to stay on hold yet signal of a cut in September, followed on Thursday by the Bank of England’s (BoE) first reduction since the start of the pandemic.
Coronavirus-era supply-chain shocks have now largely washed through global economies and inflation is at or approaching targets.
Most leading central bankers, consequently, are shifting focus to preserving economic growth and employment while Japan again plays the outlier.
This week’s decisions are keeping investors busy with plenty of assets moving in opposite directions.
“Different central banks are looking at broadly the same story and coming to different conclusions about what to do with policy,” said James Pomeroy, a global economist at HSBC Holdings Plc. It “makes meeting-to-meeting calls harder for markets”.
For now, domestic factors are in the driving seat, meaning the pace and scale of rates moves will vary across developed economies, though the divide may not last long.
Indeed, economists at JPMorgan Chase & Co envisage “the most synchronised policy easing cycle” in history outside of recessions.
“There may be a widening gap in the timing of first cuts,” said Roger Aliaga-Diaz, chief Americas economist at Vanguard Group Inc. But “we don’t see a divergence in the projected path of central bank rates over the next few years. Once the Fed starts cutting rates, most major central banks will be moving in lockstep.”
Simon White, Bloomberg’s macro strategist, said: “The BoJ’s long-awaited decisive shift of rates into positive territory marks a key moment in the post-pandemic cycle.
“Global macro imbalances that built up as the BoJ stayed ultra-loose now threaten to unwind as the Fed, European Central Bank and BoE begin to move in the opposite direction to Japan.
“The yen, US dollar, global rates and equities all face a heightened risk of greater volatility.”
After the BoJ lifted rates by 15 basis points and announced details of a planned reduction in government bond buying, the yen strengthened to its strongest since March. It also put a target of 140 versus the US dollar into the crosshairs of traders seeing tighter policy ahead.
By contrast, the US dollar this week displayed signs of softening against many rivals on the prospect of cheaper rates and as the US economy slows.
Meantime, the mounting expectation that the Fed will act in September sent Treasuries rallying, enabling July to record a third straight month of gains, the longest winning streak in three years.
The yield on 10-year notes slumped below 4% for the first time since February on Thursday as investors rushed to price in three Fed cuts this year.
Moving the other way, the yield on two-year Japanese notes this week hit a 15-year high.
As for stocks, Japan’s Topix index tumbled the most since 2020 on Thursday. The US’s S&P 500 Index advanced in the best Fed-day session since July 2022 before tumbling nearly 1.5% on Thursday amid weak economic data and a surge in bonds.
In Britain, the pound and gilt yields fell as the BoE cut its key rate by a quarter point.
Officials stressed they would be cautious about further easing, offering no specific guidance on where rates may settle nor of the speed of moves needed to get there. — Bloomberg
Already a subscriber? Log in
Get 20% OFF The Star Digital Access
Cancel anytime. Ad-free. Unlimited access with perks.
