Central bankers in three of the world’s key economic regions this week took contrasting approaches to monetary policies, reflecting the distinct challenges each region grapples with, underscoring the complexity of navigating the current economic landscape.
In Washington they paused; in Frankfurt, they hiked; and in Beijing they cut.
The moves reflect the different economic headwinds faced by the eurozone, the United States and China, and also where they are in their cycle of monetary policy.
The U.S. Federal Reserve (Fed) began rapidly and aggressively raising rates in March last year, while the European Central Bank (ECB) adopted a more gradual approach to monetary tightening.
"I don't know who has more to do, but certainly the Fed has done more than the ECB," Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics (PIIE), told Agence France-Presse (AFP).
China's situation is markedly different from the United States and the eurozone, with rate cuts on the menu as policymakers move to tackle lackluster economic growth and soaring youth unemployment.
Pause, hike and cut
On Wednesday, the Fed paused interest rate hikes after 10 straight increases, bringing its benchmark lending rate from close to zero to a range between 5% and 5.25%.
"It allows the economy a little more time to adapt as we make our decisions going forward," Fed chair Jerome Powell said, adding that the Fed expects more hikes were likely ahead.
The Fed's decision to pause was swiftly mirrored by countries including United Arab Emirates (UAE), whose currencies are pegged to the U.S. dollar.
A day later, the ECB took a more proactive decision, pushing ahead with another quarter-percentage-point interest rate hike to tackle sticky inflation, raising its key lending rate to a 22-year high of 3.5%.
The ECB's updated economic forecasts also indicated additional hikes on the horizon.
"Unless there is a material change to our baseline, we will continue to hike at our next meeting," ECB chief Christine Lagarde said after the bank raised rates to their highest level since 2001.
"So we're not thinking about pausing," she said.
On Thursday, the People's Bank of China (PBOC) cut a critical lending facility by 10 basis points to 2.65%, and extended 237 billion yuan ($33 billion) of fresh funding to lenders "to maintain reasonable and sufficient liquidity in the banking system."
The announcement came two days after it unveiled a surprise cut in short-term interest rates, which analysts said reflected growing concern about the state of the economy among Chinese policymakers.
Further hikes ahead
Both the Fed and the ECB have indicated they expect more monetary tightening will be needed to bring inflation back under control.
"Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to two percent over time," Powell said Wednesday.
Analysts have taken Powell's comments to indicate support for at least one additional quarter-percentage-point hike.
"Our baseline remains for a final 25bp rate hike in July, with the Fed then remaining on hold into early 2024," Deutsche Bank economists wrote in a note to clients after the decision.
Others see U.S. rates going even higher.
"We expect 25bp rate hikes in July and September, though a delay in the second hike to November is also possible," Bank of America economists wrote in a note.
In Europe, analysts say the ECB's updated economic forecasts point to at least two additional hikes.
"The upwardly revised path for headline and, especially, core inflation into 2025 provides a surprisingly clear indication that the ECB's tightening job is unlikely to be finished next month," said Marco Valli, Chief European Economist at UniCredit.
"We now think the ECB will deliver two more 25bp hikes, in July and September, taking the deposit rate to 4%, which we think will be the terminal rate," Pantheon Macroeconomics Chief Eurozone Economist Claus Vistesen wrote in a note to clients.
China to expand stimulus
The message from China this week has been starkly different, as policymakers at the PBOC look to reignite the world's second-largest economy after months of underwhelming data.
Beijing has kept interest rates low compared with other major economies, but near-zero inflation highlights challenges faced by officials trying to stimulate growth.
"All the data points so far sent consistent signals that the economic momentum is weakening," Zhiwei Zhang, president of Pinpoint Asset Management, said Thursday.
Alongside barely positive inflation in May, exports fell and industrial production growth slowed, as factories returned to full capacity after the pandemic.
Retail sales, which rose in April, are currently "the only functioning engine of Chinese growth," Rob Carnell, Asia-Pacific head researcher at ING, said in a note.
"I don't predict a crisis, but I do think we're in for several months – if not a year or more – of somewhat slow, weak growth in China," said Gagnon from PIIE.
Japan holds steady
The Bank of Japan (BOJ) has gone against the grain set by the Fed and ECB, announcing on Friday that it would maintain its long-standing, ultra-loose monetary policy as it looks to boost economic growth.
Officials left the bank's negative interest rate in place, pushing down the value of the yen against the dollar.
While inflation in Japan remains lower than the sky-high increases seen in the United States and elsewhere, it is above the central bank's 2% target, which has been surpassed every month since April last year.
Shigeto Nagai of Oxford Economics said the BOJ did not seem in a hurry to change its ways.
"We believe that the BOJ will maintain the status quo for another year or so to assess whether the economy is on track to achieving 2% inflation" within the new governor Kazuo Ueda's five-year term, he said.
The BOJ argues that the price rises are fuelled by temporary factors, such as the war in Ukraine, and so has stuck to its loose policies in a bid to encourage sustained growth.