Global central banks diverge on monetary policies amid economic uncertainties

Within a span of two days last week, the central banks of China, the US, and the eurozone each took different approaches in response to the evolving economic situation in their respective regions.

China cut its interest rates in an effort to support a slowing recovery, the US held its aggressive rate-hike cycle, while the European Central Bank (ECB) raised its rates to curb surging inflation.

China is reeling from the after-effects of extended lockdowns following the Covid-19 pandemic and a property slump that Goldman Sachs economists said will last for years but has no inflation problem right now.

In the US, retail inflation for May was 4%, the smallest increase since March 2021, giving the Federal Reserve leeway to pause rate hikes this week.

Europe is in a technical recession, dragged down by Germany, its largest economy, which said gross domestic product (GDP) growth had declined by 0.3% in the first quarter of the calendar year, following a 0.5% fall in the fourth quarter of 2022.

If the GDP of an economy contracts for two successive three-month periods, it is often said to be in a technical recession.

The conflicting moves also come a week after India’s Reserve Bank left its key rate unchanged while retaining its tightening stance, amid concerns of a late monsoon.

On Wednesday, Fed Chair Jerome Powell did a balancing act of sorts by leaving rates unchanged following 10 consecutive hikes since March 2022, while also warning of two more impending hikes this year. The first of those hikes is likely as soon as next month.

US policymakers are expected to meet next on July 25-26 following the release of another round of inflation and jobs data. Powell said next month’s meeting will be a “live” one, signaling that either a rate hike or a continued pause is possible.

Even as Powell flagged as much as half-point increases in rates, his ECB counterpart Christine Lagarde, who raised interest rates by a quarter point on Thursday, said another quarter-point step is “very likely” in July. 

Lagarde said inflation in the eurozone will stay “too high for too long” while adding that ECB has a task on its hands.

“The outlook for economic growth and inflation remains highly uncertain,” she said.

Meanwhile, India reported that its retail inflation in May slowed to a two-year low of 4.25%. 

While addressing the plenary session of an event organized by London-based Central Banking this week, RBI Governor Shaktikanta Das spoke on India’s economic prospects.

He said, “The disinflation process is likely to be slow and protracted, with convergence to the inflation target of 4% being achieved over the medium-term.”

“The cumulative impact of our monetary policy actions over the last year is still unfolding and yet to materialize fully,” he said.

“Central banks have had to quickly change gears from providing stimulus to pandemic-ravaged economies to battling inflation with all the ammunition at their disposal. Even as the battle against inflation was ongoing, the banking turmoil in certain advanced economies posed the awkward trade-off between financial stability and price stability,” Das said.

“This extraordinary period of global turbulence has indeed been extremely challenging for central banks and central banking,” he added.

Central Banking, a leading publication and information provider for the central banking community, conferred Das with the ‘Governor of the Year’ award earlier this week.