The weekly report of QNB Group confirmed that senior officials from major central banks in advanced economies, with the notable exception of Japan, decided to send a “tough” tone at the Sintra Forum. After a late start to last year’s tightening cycles, which allowed inflation to spike, central banks are still on a mission to restore credibility. This situation is likely to push them to choose to “tighten” the uncertainty.
Every summer, the European Central Bank organizes the prestigious Monetary Policy Forum in Sintra, Portugal. The event is one of the most important central bank conferences in the world, bringing together leading economists, bankers, market participants, academics and policy makers to discuss long-term macroeconomic issues.
Since its inception in 2015, the forum has garnered a lot of attention due to the influential speeches delivered by senior policy makers, which makes it rival the Jackson Hole Conference in its attractiveness to investors.
With tightening monetary conditions beginning to affect economic activity, there is now uncertainty about what will happen next: have the major central banks finished their rate-raising cycle? Do we expect a long “pause” in changing monetary policy? Are there plans for interest rate cuts later this year?
In our view, the insights articulated during the meeting by senior central bankers point to three main conclusions: interest rates are likely to rise further, growth will continue to slow, and Japan will continue to be the biggest exception when it comes to monetary policy.
First, despite expectations at the beginning of the year of major central banks switching to a “do-it-yourself” stance and cutting interest rates early, policy tightening remains the order of the day for the Fed, the European Central Bank and the Bank of England. Advanced economies have proven to be more resilient than previously thought
Second, the monetary authorities have acknowledged that a sharp economic slowdown is inevitable and asserted that a slight recession or moderate weakness would not alter their trajectory. Although all senior officials refrained from speaking directly about their willingness to withstand recessions, Governor Bailey reiterated the BoE’s earlier recessionary forecasts, along with the bank’s firm stance on tightening monetary policy. Moreover, Chair Powell and Chair Lagarde acknowledged the possibility of a recession in the next few quarters, while hinting that they would accept such scenarios as a necessary sacrifice to curb persistent high inflation.
Third, the Bank of Japan takes a very different stance from other major central banks. BoJ Governor Kazuo Ueda noted that although core inflation has risen, core price pressure indicators such as wage growth are still not sufficiently aligned with the BoJ’s long-term inflation target for Japan. He predicted a short-term decline in inflation, followed by a rise in the next year. Noting that only with conclusive evidence of the latter’s occurrence will he feel comfortable making any adjustment to his loose monetary policy.
