(Bloomberg Opinion) -- The idea that some central banks are charging ahead with interest rate hikes to quell inflation while others take a more relaxed view is subject to serious challenge. For a year that was supposed to be marked by a big global split in monetary policy, authorities are starting to sound pretty similar. This unusual moment of relative agreement could mean that the market upheaval we've seen in recent weeks could start to subside.
In Europe and the U.K., nasty inflation surprises are pushing central banks to respond quicker and more aggressively than anticipated. The prospect of higher rates in the euro zone — just days ago considered a question for 2023 — is suddenly on the agenda after European Central Bank President Christine Lagarde on Thursday cited “across the board” anxiety about record price gains. Hours earlier, the Bank of England raised its benchmark rate by a quarter point, but came close to shocking investors with a half-point increase for the first time since the institution gained independence in 1997.
In Australia, long seen as a dovish outlier, comments this week from Reserve Bank Governor Philip Lowe mean higher borrowing costs are plausible this year. At the Federal Reserve, all three nominees to join the Board of Governors placed a high priority on tackling inflation when they were vetted by U.S. lawmakers this week.
All this is to say that the hawk versus dove descriptions are looking stale and overly simplistic. Most economies are now moving in the same direction. In many instances, the arguments are no longer about whether to hike, hold or cut. They are about how quickly to respond to inflation with rate increases.
The only true outlier — and admittedly a big one — is China. More juicing, not tightening, is likely from Beijing. Japan, considered to be in perennial loose mode, has ruled out an increase. But some fiddling with quantitative easing is conceivable. The Bank of Japan has taken a more robust view of inflation risks, raising its forecasts slightly. The end of Haruhiko Kuroda's second term as governor early next year provides an opportunity to pivot.
The dangers of misjudgment are multiplying. Policy makers find it tough to guide markets and businesses about their intentions with the degree of confidence exhibited since the 2008 financial crash. That's because inflation has misbehaved. Central banks aren't yet trying to actively cool the economy. Actions are framed as removing the extraordinary accommodation deployed at the peak of the pandemic. If inflation is persistently high after they get to the so-called neutral level that neither restrains nor stimulates growth, more difficult discussions will need to be had. For now, though, the less bifurcated message should be welcomed by investors.
It's nevertheless a fine line. To prove price-fighting credibility, central banks risk over-compensating with tough responses that shock companies and consumers. In some instances, officials are tempted to bring forward nasty medicine in the hope that less will be needed later. “I am in the 25 [basis point] camp because I think it's wise to take it in steps,” BOE Governor Andrew Bailey said in an interview with Bloomberg Television. “The case for 50 is clear. But for me the 25 call was not a close call. It's about how to operate in a period of uncertain monetary policy.”
The ineffectiveness of hand holding has led to a race among market-watchers as to who can put out the most aggressive forecasts. Barely a day has passed in recent weeks without a Wall Street bank bidding up its interest-rate projections. Bank of America Corp. went as far as predicting rate increases at all seven remaining gatherings of the Federal Open Market Committee this year.
The only ones who can stop this feeding frenzy are the central bankers themselves — but their hands are tied. “The problem is that there is too much uncertainty about the trajectory for inflation,” Roberto Perli, a former Fed economist now at Cornerstone Macro in Washington, D.C., said in a note this week. “In these conditions, the Fed is simply not in a position to provide forward guidance as to the pace of tightening.”
The true divergence among advanced economies is probably going to be about the degree of tightening, not whether it happens at all. The year is still very young and there have been plenty of surprises. They are unlikely to be the last.
More From This Writer and Others at Bloomberg Opinion:
- Bank of England Wakes Up as a Hawk on Inflation: Marcus Ashworth
- Fed Deals New York City, Los Angeles Another Setback: Conor Sen
- RBA Takes a Baby Step in From the Cold: Daniel Moss
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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