Major countries around the world are on high alert for inflation. As a result, their interest rate reduction policies are slowing down.
U.S. Treasury Secretary Janet Yellen mentioned in an interview with the Financial Times on May 25 (Korean time) that many Americans are still struggling due to inflation. She also commented that some Federal Reserve (Fed) officials need to further confirm price stability before deciding to lower interest rates.
The U.S. announced last week that the rate of price increases has slowed for the first time this year, spreading expectations of early interest rate cuts. However, the policy authorities are sending a different message. On the 15th, the U.S. announced that the consumer price increase rate in April was 3.4%, 0.1% lower than the previous month.
The minutes of the Federal Open Market Committee (FOMC) released by the Fed last week also included concerns about the difficult situation of controlling inflation. The minutes stated, “Members generally noted the uncertainty about the persistency of inflation,” and “they agree recent indicators have not given confidence that inflation is persistently heading towards the target level of 2%.” They also added, “Various members are willing to tighten further if the risk of inflation becomes a reality.”
Inflation is also a significant issue in Korea. Governor Rhee Chang Yong of the Bank of Korea explained at a press conference after freezing the base rate on the 23rd, “Since the growth rate forecast has increased, the pressure of inflation has naturally increased.” Despite the slowdown in inflation, Rhee emphasized that we should watch whether it converges to the target level (2.0%) due to increased uncertainties. The Bank of Korea maintained this year’s inflation forecast at 2.6% but raised the second-half forecast by 0.1%.
JP Morgan predicted the interest rate cut in the fourth quarter after evaluating the Bank of Korea as hawkish. Bloomberg Intelligence (BI) hinted that the Bank of Korea is not sure whether it can change the restrictive interest rate, as the April inflation rate in Korea was lower than expected at 2.9% but still higher than the target. BI said, “The Bank of Korea is unwilling to take the risk of triggering further depreciation of the Korean Won by moving ahead of the Fed,” and “By August, inflation will have stabilized enough for the Bank of Korea to start cutting interest rates.”
In the UK, expectations for interest rate cuts have weakened due to assessments that the price stability has stagnated. The UK’s consumer price increase rate in April was 2.3%, significantly lower than 3.2% in the previous month but exceeding the forecast (2.1%). According to Bloomberg, the probability of the Bank of England (BOE), the central bank, cutting the policy rate by 0.25% in June dropped sharply from 51.8% the day before the inflation index was announced to 13.9%. The financial market focused on the slower pace of moderation in core prices (3.9%) and service prices among consumer prices (5.9%), rather than the inflation rate approaching the target (2.0%).
However, the European Central Bank (ECB) is expected to be the first major country to cut interest rates on June 6th. François Villeroy de Galhau, a policy member of the ECB and the Governor of the Bank of France, said that as he gained confidence about prices, it is highly likely to see the first interest rate cut in June unless there are any unexpected circumstances. According to Eurostat, the statistical agency of the European Union, the consumer price increase rate in the eurozone was at 2.4% in April, which was the same as the previous month.
Nevertheless, there still are concerns that high wage increases will stimulate inflation. According to Reuters, the ECB’s interest rate cut forecast for this year fell from 0.67% at the beginning of this week to 0.58% after the wage indicators were announced on the 23rd. The negotiated wage increase rate for the first quarter in the eurozone was 4.69%, exceeding the 4.45% in the fourth quarter of last year. The eurozone wage increase rate has been maintained in the 4% range since the first quarter of last year.
Japan faces a different situation as it has the task of raising interest rates. As expected, Japan’s consumer price index (excluding fresh food) in April rose 2.2% compared to the same month last year. The inflation rate fell 0.4% from the previous month, slowing for the second consecutive month. Reuters explained that the Bank of Japan would be cautious about raising interest rates as the consumption is still weak.