As national factors take precedence over global trends, divergences emerge among the monetary policies of major economies.

Pioneering inflation targeting in the early 1990s, New Zealand has often led the way in monetary policy. This could happen again, with investors increasingly assessing the possibility of an interest rate hike by month’s end.

In the United States, persistent inflation and labour market strength will likely defer rate hikes that investors anticipated as early as March. In the eurozone, which narrowly avoided recession last year, downward pressure on prices is easing faster than expected, bolstering the arguments of those advocating for earlier cuts.

Conversely, the Swiss National Bank may cut interest rates as soon as next month. Meanwhile, the UK is grappling with an economic slowdown and high inflation, leaving the Bank of England in the most challenging position. At the same time, Japan, long sidelined in its decades-long quest to overcome deflation, may diverge in the opposite direction with its first interest rate hike since 2007 in the coming months.

The latest IMF projections highlight divergences among major economies: improved outlooks in the United States, a struggling eurozone, and dismal figures for the UK. For the first time, some major firms, notably Citigroup, are discussing the scenario we mentioned a few months ago: a very brief Fed easing cycle followed by rate hikes shortly after.

The dilemma for central banks is to avoid premature easing that would negate hard-earned credibility gains and trigger an inflation rebound. Still, they should not delay reductions too much, risking growth and inflation falling below target.

A change in factors driving inflation complicates the precise analysis of existing trends. Price pressures are increasingly driven by services, with wages having a more significant impact than manufacturing. These local pressures are, by definition, more idiosyncratic, meaning central banks will have to respond in their own way. In the US January inflation report, for example, gains were fueled by rising food, car insurance, and medical care prices, while housing costs contributed to more than two-thirds of the overall increase. In the US, inflation is more demand-driven, while the eurozone must manage inflation imported through rising energy costs.

The shift to more varied policies by central banks would constitute a return to the norm outside crisis periods. The problem is that we remain in a crisis period. Major trends in technology, energy, and commodities affecting all economies will likely retain some degree of policy coherence. In the longer term, central banks face very different structural issues, such as varying demographic growth rates, dependence on energy imports, changes in supply chains, and housing dynamics. Therefore, it is almost inevitable that the uniformity observed since mid-2020 will recede.

Another consequence of upcoming different monetary policies is increased volatility in the foreign exchange market. In an environment of weakening growth, a new currency war is not out of the question. In the current context, it is almost inevitable that the dollar will remain strong, especially against the euro. This will undoubtedly create tensions between the two blocs and protectionist measures. The Biden administration’s anti-inflation law is a perfect example.