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Money Market FundsThe global monetary policy environment has shifted markedly as the escalation of the Middle East conflict and higher energy prices have renewed inflation pressures, interrupting the global easing cycle. At the same time, weakening economic growth and elevated global bond yields are complicating the policy outlook. With higher yields already tightening financial conditions, central banks face an increasingly difficult balance between containing renewed inflation pressures and avoiding an unnecessarily sharp slowdown in economic activity.
The Fed reinforced the shift towards tighter policy this week, raising the federal funds target range by 25bp to 3.75%-4.00%. While softer growth and elevated bond yields may argue for caution, resilient domestic spending and persistent inflation have given the Fed sufficient scope to tighten policy. The extent of any further tightening will depend on whether inflation pressures remain elevated as economic momentum slows.
The ECB has also changed course, raising policy rates by 25bp last week, linking the move to renewed inflation pressures from the Middle East conflict. Slightly stronger growth gives the ECB room to tighten further should inflation pressures persist.
The BoE kept its Bank Rate unchanged at 3.75% this week but delivered a notably more hawkish signal, with three MPC members favouring an immediate 25bp hike. While weak domestic demand argues for caution, persistent energy prices and second-round effects could prompt a hike in November.
Finally, the BoJ raised its policy rate by 25bp to 1.25%, the highest in three decades and the fastest pace of policy normalisation since 1990. However, the widely anticipated move provided little support to the JPY, with USD-JPY trading back towards 157 following the decision. The 7-2 vote and absence of significantly more hawkish forward guidance also limited expectations for an accelerated tightening cycle, with Governor Ueda continuing to make further hikes conditional on the inflation and economic outlook. Crucially, the move does little to close the still-wide interest-rate differential with the US as further Fed rate hikes are expected.
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