Top European central banks on Thursday reaffirmed their commitment to maintaining policy interest rates higher for a longer period to fight inflation, which is proving stickier in some parts of the world than others.
It dashes any expectations that a potential shift by the U.S. Federal Reserve (Fed) toward lowering interest rates would mark a global turning point.
Extending the hawkish stance that has dominated global central banking for two years, the European Central Bank (ECB) on Thursday gave away little about its future moves after keeping its benchmark rate at 4%, saying it would remain "at sufficiently restrictive levels for as long as necessary."
The Bank of England (BoE) said in a statement that the Bank Rate would remain high for "an extended period." Swiss National Bank also left rates unchanged.
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."
Central banks worldwide drastically raised rates to contain inflation that broke out in the wake of the COVID-19 pandemic and Russia's invasion of Ukraine. They're now trying to balance keeping rates high for long enough to ensure inflation is contained against the risk that higher borrowing costs could throw their economies into recession.
Though price pressures were easing, the ECB said it expected a near-term increase in inflation, and bank President Christine Lagarde said some components of inflation were "not budging."
"Should we lower our guard? We ask ourselves that question. No, we should absolutely not lower our guard," Lagarde said at a news conference, speaking hoarsely and coughing at times because she said she was recovering from COVID-19 but was no longer contagious.
"We did not discuss rate cuts at all," she said. "No discussion. No debate ... Between hike and cut there is a whole plateau."
Inflation has fallen more than expected in the 20 European Union countries that use the euro currency, to 2.4% in November from a peak of 10.6% in October 2022.
That has led analysts to predict the ECB will cut rates next year, though the timing is not certain and forecasts range from March to September for the move.
The bank's messaging Thursday showed that "there’s still a long way to go before the ECB starts cutting rates," said Carsten Brzeski, chief eurozone economist at ING bank. "It should also be clear that the end of a hiking cycle does not imminently lead to a cutting cycle."
Brzeski said he sees the first rate cuts in June.
On the other hand, inflation was likely to be "quite a lot lower" than the ECB expects, so the first cut of a quarter-percentage point could come in April, with four more such cuts to follow, said Andrew Kenningham, chief Europe economist at Capital Economics.
Higher interest rates combat inflation by increasing the cost of borrowing throughout the economy, from bank loans and lines of credit for businesses to mortgages and credit cards. That makes it more expensive to borrow to buy things or invest, lowering demand for goods and easing prices.
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 the end of 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.