The highly anticipated annual meeting of the central bankers in Jackson Hole this week It will take place in a context characterized by challenges clearly different and unique for each region. While in the past years the central banks were facing similar challenges, such as quantitative Easing and financial support linked to the pandemic, this year’s meeting takes place in a very different context. The central banks are now facing a new era, in which monetary policies will take an even more crucial role in the months to come. Andrew Jackson, Head of Investments, Vontobel underlines it.
Jackson Hole, the wait rises
This dynamic – explains the expert – is particularly evident for the main central banks such as the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BOE), the Swiss National Bank (SNB) and the Banca del Japan (BOJ). Each institute must face distinct economic pressures, which make their tasks particularly complex. Among these, the ECB seems to be in the most favorable position, having made significant progress towards all its objectives, including the achievement of the neutral rate, as recognized by the president Christine Lagarde. The other central banks still remain reluctant to carry out discussions on the neutral rate.
Central banks, divergent challenges
The ECB stressed that it does not consider it necessary to take further measures, unless the Economy of the Eurozone does not undergo a worst deterioration of the expectations. If economic growth reaches 1% next year, inflation will stabilize around 2% and the situation regarding duties will not worsen, it is unlikely that the ECB will introduce further measures. However, in the event of worsening the conditions, the ECB could take into consideration the possibility of temporarily descending below the neutral rate to preserve the flexibility of monetary policy. This scenario could occur next year if economic growth in countries such as Germany and France was less than expectations. The ECB will also carefully monitor the actions of the Fed, since the rhythm of the cuts of US rates could influence its monetary policy decisions.
From ECB to Fed, the next moves
In the meantime, the Fed is facing a particularly difficult path. Political pressures are increasing, with the White House that pushes for a cut of the rates and the possible appointment of a new president of the Fed most aligned with the economic agenda of President Trump. The Fed will probably also have to deal with the impact of the duties, which are currently absorbed by the US importers but which could affect consumers at the beginning of 2026. Although the data on July inflation did not yet reflect the pressures related to the duties, the surge in Wholesale prices in the United States given last week indicates that the effects are starting to be felt on the economy. The latter is starting to show signs of overheating, therefore we plan that US inflation could reach 3.5% by half of next year. The Fed should then proceed with caution, implementing two rates cuts this year starting from September, followed by three other cuts in 2026.
BNS is also facing a series of challenges, since the US duties of 39% on most goods will have an impact on the Swiss economy, with the risk of further contraction of growth next year and an increase in pressure on employment. At the same time, Swiss inflation remained close to zero this year, but recent data surprised up, pushing the central bank to carefully evaluate monetary policy decisions. With the reference rate to zero from June, the BNS has a limited maneuver margin and could consider a 0.25% cut and enter the negative territory by the end of the year or at the beginning of the next.
Spotlight on the Boe
For its part, Boj must face the delicate task of preventing the closing of Carry Trade’s positions, a challenge that requires a lot of attention. However, in our opinion, it is the Boe that has to face the largest challenge among the main central banks, being very worried about the fragility of the UK market dynamics. On the one hand, governor Andrew Bailey and his team fear that a delay in lowering rates may curb economic growth; on the other, cautiously remain regarding inflationary pressures, given that inflation in the United Kingdom is still far from being under control.
The different challenges that each institute must face demonstrate the complexity of the current global economic panorama. Perhaps more than ever this year, the decisions that will be taken in the coming months will be fundamental to define the trajectory of their respective economies.
