By Howard Schneider
WASHINGTON (Reuters) – Major European central banks on Thursday stuck with plans to keep their policy interest rates higher for longer to fight inflation that is proving stickier in some parts of the world than others, dashing any hope that a U.S. Federal Reserve pivot towards interest rate cuts marked a global turning point.
Extending the hawkish stance that has dominated global central banking for two years the Bank of England said in a statement that the Bank Rate would remain high for “an extended period,” while the European Central Bank said the euro zone’s benchmark rates would remain “at sufficiently restrictive levels for as long as necessary.”
Both the BoE and ECB kept their policy rates steady. But the language of their decisions contrasted with that of Fed Chair Jerome Powell who, after a policy meeting at which the U.S. central bank also remained on hold, gave the Fed’s decision a dovish tilt.
“That’s us thinking we’ve done enough,” Powell said on Wednesday of new projections that showed policymakers anticipate cutting their benchmark rate by three quarters of a point by the end of 2024.
Europe, however, is on a different path, with the BoE seeing a split 6-3 vote with three of its members favoring another rate increase, and Norway’s central bank approving a surprise quarter point rate hike amid more persistent inflation.
The Swiss National Bank did note declining inflation in a statement analysts construed as a sign of possible rate cuts next year – something its policymakers remained silent on.
But in its latest policy statement, the ECB said that while the price outlook had improved over the long term, rising unit labor costs continued to pose risks and inflation “is likely to pick up again temporarily in the near term.”
Though price pressures were easing, the ECB said it expected a near-term increase in inflation, and ECB President Christine Lagarde in her press conference said some components of inflation had not budged.
“Should we lower our guard? We asked ourselves that question. No. We absolutely should not lower our guard,” Lagarde said, noting that some components of inflation were “not budging.”
“We did not discuss rate cuts at all,” she said. “No discussion. No debate…Between hike and cut there is a whole plateau.”
The BoE said its headline inflation was expected to remain around 4.5% through the end of this year, still well above the 2% inflation target it shares with the Fed and ECB.
That’s also well above new Fed projections showing core inflation ending 2023 at 3.2% with strong arguments, given recent behavior in producer prices and rents, that it will continue falling. By end 2024 Fed officials project both core and headline inflation will be 2.4%, within striking distance of their goal and low enough for Fed officials to anticipate rate reductions.
“We are seeing strong growth that … appears to be moderating. We are seeing a labor market that is coming back into balance … We’re seeing inflation making real progress,” Powell told reporters. “These are the things we’ve been wanting to see … Declaring victory would be premature … But of course the question is ‘when will it become appropriate to begin dialing back?'”
With the Fed now seen as the early mover to lower rates among the major central banks, the dollar slid to a four-month low against a basket of trading partners’ currencies. The BoE’s and ECB’s refusals to follow in the Fed’s footsteps slowed the rally in British and European bonds, with benchmark yields in the regions near their highs of the day after the two announcements, though they remained lower than Wednesday’s closes.
(Reporting by Howard Schneider; Editing by Andrea Ricci)
