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Why monetary policy moves are out of sync worldwide
'To each their own' seems like a mantra for global central banks amid the ongoing economic week, the US Federal Reserve kept policy rates move was largely anticipated, but chairman Jerome Powell's hawkish tone indicated that rates would remain unchanged until more clarity emerges on the impact of tariffs.
The90-day US pause on bilateral tariffs ends on 9 trade restrictions could push inflation higher in many economies, hurting real incomes and business confidence. The Israel-Iran conflict, now joined by the US, has added another layer of uncertainty. The geopolitical risk has pushed global crude oil prices higher, which is detrimental for many emerging market (EM) economies that import oil.
On shaky ground
So, global central banks are treading with caution. The central bank of Taiwan, Bank of Japan and Bank of England kept interest rates on hold last week. On the other hand,Brazil's central bank raised interest rates by 25 basis points (bps) to tame inflation. In contrast, the European Central Bank (ECB) trimmed rates by 25bps in early June and the Reserve Bank of India (RBI) cut repo rate by a larger-than-expected 50bps.
Monetary policy divergence, where central banks adopt varying approaches, is expected to persist as they strive to balance domestic growth and inflation. 'The US is a domestically driven economy, but since the Fed has already trimmed rates, they have the room to wait for gauging the impact of tariffs. The ECB is more external demand-driven; so, they may opt for more easing," said Gaura Sen Gupta, economist at IDFC First Bank. Also, lately, weather fluctuations have made policy decisions tougher, especially for EM central banks, given the higher weight of food inflation for EMs than developed markets (DMs), she added.
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It is not new for central banks to take varied paths during a crisis. In the aftermath of the covid-19 pandemic, some central banks tightened at a faster pace than others. This time, most central banks are on a trajectory of easing; however, the pace of easing has diverged significantly. But what makes this easing cycle most interesting is that even as Fed rate cuts have been relatively limitedversus the restof the DMs,the dollarhas weakened on policy credibility, said Anubhuti Sahay, head of South Asia Economic Research, Standard Chartered Bank. This environment of weaker US dollar enables EM central banks to ease more as risks of currency depreciation and imported inflation are limited, she added. Sahay expects RBI to be on a status quo in the near term, but for countries like Malaysia and the Philippines, there is more room to cut rates.
Typically, diverging monetary policies create interest rate differentials, leading to currency fluctuations. Given the role of the US dollar as the global reserve currency, the Fed's decisions are a crucial driver of global liquidity conditions and tend to have significant spillover effects on EMs. Currently, there are growing concerns over slowing global growth and financial could lead tocapital flow volatility and sour investment appetite for Asian economies affectedby trade tariffs, high crude oil prices, or both.
Recently, the World Bank cut its global growth forecast for 2025 to 2.3% from 2.8% earlier, with deceleration expected in most economies relative to last year. 'Although central banks are anticipated to continue lowering monetary policy rates, the future path of interest rates is uncertain considering the potential risks that higher tariffs pose for the disinflation process, particularly in the US," it said in Global Economic Prospects report in June.
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