Hawkish and dovish central banks – and the one-size-fits-all ECB dilemma
Rate cuts are priced in around the world this year. However, there has been some recent pushback on those expectations: {{nofollow}}Jerome Powell suggested Fed watchers shouldn’t expect a cut in March.
This chart assesses the relative hawkishness of various central banks by taking their key interest rate and subtracting core inflation to get a sense of their “real” policy stance. In the case of the UK and Australia, inflation and the policy rate match: a true neutral stance.
The presence of Latin American countries on the left-hand side is notable. Last year, we named Brazil and Mexico as “early hikers:” their central banks have had more history of steeply raising rates to fight inflation in recent decades than their developed-market peers.
However, green bars don’t just reflect tough policy: they can be a consequence of speedily cooling inflation, as seems to be the case for Canada and India.
Unsurprisingly, Japan is at the right-hand side of the chart: still running a negative interest-rate policy even as price increases pick up, as the central bank awaits a “virtuous” wage-price spiral.
Ireland and Finland are also notable due to their elevated inflation, showing the challenges of the European Central Bank’s one-size-fits-all monetary policy for 20 countries.