Key facts
- The ECB is considering further interest rate hikes in June due to rising inflation risks.
- Eurozone manufacturing growth slowed in May, with input costs reaching a four-year high.
- Euro area retail sales declined 0.4% in April.
- The Bank of Japan signaled a potential policy shift to combat rising inflation.
- The yen strengthened against the dollar as the Bank of Japan signaled a policy shift.
- US research suggests the economy is less vulnerable to oil shocks, allowing the Fed to prioritize inflation.
- Dallas Fed President Lorie Logan believes current monetary policy is "a bit loose" and needs to be restrictive.
- Cleveland Fed President Beth Hammack indicated rates may need to rise if inflation persists.
- South Korea's consumer inflation accelerated to 3.14% in May, a 26-month high.
- The Reserve Bank of India signaled potential rate hikes from August.
- Fitch Ratings lowered its global economic growth forecast due to US-Iran tensions.
- UK businesses expect price growth to slow to 4.0% over the next 12 months.
Global central banks are increasingly signaling a hawkish monetary policy stance due to persistent inflation risks, exacerbated by geopolitical conflicts and supply chain disruptions. The European Central Bank (ECB) is facing pressure to consider further interest rate hikes, with Executive Board member Isabel Schnabel indicating that the bank cannot ignore the inflationary impact of the Middle East conflict and rising global price pressures. She signaled that open-ended rate hikes are likely, citing a growing risk of unanchored inflation expectations. Several Governing Council members have expressed support for a June rate hike, with some viewing a potential increase as an "insurance hike" to maintain credibility, despite mixed economic signals. Vice President Luis de Guindos noted that a June hike is uncertain and that a global supply shock will affect inflation before growth, potentially tempering economic expansion. Eurozone manufacturing growth slowed in May, with input costs reaching a four-year high, and retail sales declined 0.4% in April, while Q1 GDP was revised to a 0.2% contraction. Consumer inflation expectations in the Eurozone, however, remained steady or eased slightly.
In Japan, Governor Kazuo Ueda signaled a shift towards inflation fighting, indicating readiness to act against rising inflation, leading to market expectations of a rate hike at the June 15-16 meeting and a strengthening yen away from the 160 level against the dollar. In the United States, research suggests the economy is less vulnerable to oil shocks than in the 1970s, potentially allowing the Federal Reserve to prioritize inflation over jobs in the event of an Iran war-sized oil shock. Dallas Fed President Lorie Logan believes current monetary policy is "a bit loose" and needs to become restrictive, noting inflation is trending towards 2.5%. Cleveland Fed President Beth Hammack indicated that rates may need to rise if inflation persists, expressing greater concern about elevated inflation than risks to full employment. San Francisco Fed President Mary Daly, however, stated that AI is not currently driving inflation and attributed current price pressures to tariffs and energy/food prices, emphasizing the Fed's 12-month policy horizon.
Other countries are also grappling with rising inflation. South Korea's consumer inflation accelerated to a 26-month high of 3.14% in May, driven by transport costs. The Reserve Bank of India maintained its repo rate but upgraded inflation forecasts, signaling potential rate hikes from August due to geopolitical and supply chain risks. Fitch Ratings has lowered its global economic growth forecast for 2020, citing the broad damage inflicted by escalating US-Iran tensions. UK businesses anticipate a slowdown in price growth to 4.0% over the next 12 months, down from 4.4%, though they planned a 0.4% reduction in employment. Some analysts suggest that central banks like the ECB, BoJ, BoE, and SNB may be overpricing interest rates, with recency biases from 2022 potentially influencing decisions for 'insurance' hikes that are unlikely to have significant impact.