Central banks face a widening dilemma as oil prices climb again while inflation cools. The Federal Reserve, the European Central Bank and the Bank of England are diverging on rate policy just as new leadership and government debt pressures complicate their next moves.
The Federal Reserve, the ECB and the Bank of England are pulling in different directions on interest rates as the Iran war pushes oil prices back up even as headline inflation eases. US inflation edged lower to 3.4% in July from 3.5% in June and 4.2% in May, largely on falling petrol prices. Since then, however, Brent crude has risen again to about $90 a barrel, a move that threatens to push US energy and transport costs higher in the second half of the year.
The Fed holds while Warsh reshapes the playbook
New Fed chair Kevin Warsh has launched a review of the central bank's operations, drawing on advice from 15 outside experts, and has dropped forward guidance and dot-plot projections. The Fed held rates in July and markets expect another hold in September, though a rise is thought possible. Markets anticipate at least one, and possibly two, quarter-point increases by the middle of next year, taking the Fed's target rate from its current 3.5-3.75% range to 4-4.25%.
The BoE weighs a September move
The Bank of England has held its Bank Rate steady at 3.75% so far this year, saying it will act if inflation persists. UK CPI dropped to 2.6% in June, but some analysts expect it to rise to 2.9% or even 3% when July figures are published on 19 August. Nevertheless, financial markets predict the BoE will raise rates this year, possibly from its September meeting, on a path toward 4.25% by late 2027.
The ECB has already moved
Unlike the Fed and the BoE, the ECB raised interest rates in June after only a modest rise in inflation tied to the Middle East war and rising oil prices. According to Neil Shearing, chief economist at Capital Economics: "The ECB was clearly fighting the previous war and prematurely raising rates." He and many other analysts believe financial markets are wrong to expect the ECB will raise its main deposit rate by a quarter-point to 2.5% at its September meeting, and possibly act again next year.
High and rising government debt complicates the picture further. The US paid the highest borrowing costs to sell 30-year bonds since 2001 in a debt auction this month, underlining the tension between fighting inflation and managing debt costs across all three economies.
Source: The Guardian
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