Major central banks hold key policy meetings

It has been a busy week for central banks news, with key policy decisions coming from the US Federal Reserve, the Bank of Japan and the Bank of England.

At the end of its two-day monetary policy meeting on Wednesday, the Federal Reserve held the benchmark interest rate unchanged at a 23-year high of 5.25-5.5%. While the rate decision itself was widely expected, the meeting served as a platform for the central bank to signal a likely rate cut as early as September.

A rate reduction, which would be the first since the pandemic, would amount to a crucial shift in monetary policy and a potential boost to the US economy by lowering borrowing costs for such things as mortgages, auto loans and credit cards. It has been two years since the Federal Reserve launched an aggressive fight against inflation and one year since it left its benchmark interest rate at a near-quarter-century high.

Earlier in the week, the Bank of Japan raised the cost of borrowing for only the second time since before the Global Financial Crisis, as it attempts to normalise monetary policy in the world’s fourth largest economy, after decades of economic stagnation. The central bank increased its benchmark interest rate to 0.25% from a range of zero to 0.1%. The rate was last increased in March, when the bank raised its policy rate for the first time since 2007. Japan’s shift to tighter monetary policy contrasts sharply with the broad swing to lower interest rates by other major central banks.

Indeed, on Thursday, the Bank of England cut interest rates for the first time since the start of the COVID pandemic, after ratcheting up borrowing costs to combat the worst inflation shock in four decades. In a finely balanced decision, the Monetary Policy Committee of the Bank of England decided to cut its benchmark rate by a quarter-point to 5% from 5.25%, which was the highest since early 2008. Four members of the committee voted to maintain the rate at 5.25%. Governor Andrew Bailey struck a note of caution against expectations that there would be a rapid fall in borrowing costs.

“We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much,” he said.

This article does not constitute legal and, or financial advice and is being issued for information purposes only by Bank of Valletta plc, 58, Zachary Street, Valletta. Bank of Valletta is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap.371 of the Laws of Malta) and the Investment Services Act (Cap.370 of the Laws of Malta).