The energy crisis and the winds of war in the Middle East are reshaping the rules of the global economy. The prices of petrol and raw materials remain high, and central banks find themselves at a crossroads: raise interest rates to curb the cost of living or lower them to give oxygen to businesses and families? Analysts from the ING banking group have charted the course for the coming months. The biggest surprise comes from the United States.
Federal Reserve towards a surprise turnaround
While historic changes of guard and strong internal discussions are taking place within the board of the Federal Reserve (the Fed), the American strategy seems to be changing course. Inflation in the United States could exceed 4% this summer due to fuel costs. However, experts believe that this “high cost of living” will not last forever: high prices will end up slowing down consumption, weakening the job market. For this reason, ING predicts that the Fed will pause in the coming months, and then move on to two interest rate cuts: the first in December this year and the second in March next year. A move designed to revive the economy.
ECB ready to take action as early as June
The situation is the opposite in Europe. The signals sent by the ECB were very clear: a rate increase in June is practically certain. Even if tensions in the Middle East suddenly vanish, the damage to prices has already been done and inflation will continue to hit the pockets of European citizens. The great unknown remains the role of governments: if states approve massive aid to pay bills or support incomes, the risk is of further fueling inflation, forcing the ECB to take even harsher interventions. For now, however, only one “precautionary” increase is expected in June to send a message of firmness to the markets.
London thinks about it, but the shield remains high
The Bank of England (BoE) is also oriented towards a single rate increase in June, but is moving very cautiously. Before international tensions broke out, English bankers were even ready to cut the cost of money. For now the line chosen is that of “active maintenance”: leaving rates high without touching them is already considered a way to slow down the economy. If the geopolitical crisis does not improve in the coming weeks, the upward adjustment will become inevitable, even if experts rule out the flurry of increases that many financial markets feared.
Japan: goodbye to low rates to save the yen
The most radical change is taking place in Tokyo. The Bank of Japan (BoJ) has historically maintained ultra-low interest rates to stimulate the economy, but this season appears to be over. The strong weakness of the local currency (the yen) and the fear that prices will go out of control are pushing the bank’s top management to intervene. Japanese workers’ wages are finally rising, and with them, so is inflation. ING therefore expects a first rate increase in June and, if the price run continues to be felt, a second upward adjustment by the end of the year.
