Unsurprisingly, the Bank of Japan (BoJ), the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) opted to keep their policy rates unchanged at their meetings in April. However, beneath this shared decision lie subtle differences that enable us to categorize each central bank based on how ready they are for a rate hike in the near future. The ECB ranks first, followed closely by the BoJ and the BoE, with the Fed remaining apart. Although the current energy shock is a global phenomenon and of a stagflationary nature (leading to lower growth and higher inflation), the dilemma varies for each central bank. The United States is experiencing higher inflation but it is benefiting from higher growth too, while economic activity is expected to be more adversely affected in other countries. Assuming a gradual normalization of the situation in the Middle East, the reaction function of each central bank suggests that we can expect a 25-basis-point (bp) rate hike in June from the ECB, the BoE, and the BoJ, while the Fed is likely to maintain its current stance (albeit with a low but growing risk of aligning with this trend).
Four status quo perspectives
Our comparison is based on the following factors: the number of dissenting votes, the tone of the statements and press conferences, the characterization of monetary policy, and the presentation of the economic situation and outlook for each country[1]. It appears that, in our assessment, the ECB exhibits the most hawkish bias—indicating the clearest inclination to raise its policy rates soon in response to the inflationary impact of the ongoing energy shock. Its status quo in April (the only unanimous decision among the four central banks) does not mean that a response is not required. The decision was warranted given the lack of sufficient information to act as early as this month, coupled with the fact that the ongoing tightening of credit conditions is already doing part of the job. However, the possibility of a rate hike was discussed at length. President Christine Lagarde refrained from making any explicit pre-commitment and reiterated the ECB’s data-dependent, meeting-by-meeting approach. Nevertheless, a clear signal was given in favor of a rate hike in June, barring a sudden change in conditions.
