Central Banks Split on Rate Hikes Amid Global Economic Divergence

Financial markets have been surprised by the recent decision of some central banks to raise interest rates. The European Central Bank (ECB) raised its rate on September 10, followed by the US Federal Reserve on September 16, and the Bank of Japan (BOJ) hiked its policy rate to 1.25 per cent on September 18.

The reasons behind these decisions are not as clear-cut as they may seem. While some central banks, like the ECB and Fed, are raising rates to combat inflation, others, such as the Bank of England (BOE) and Reserve Bank of India (RBI), have chosen to hold their rates steady.

The BOJ's decision is particularly noteworthy. Despite a sluggish economy, Governor Kazuo Ueda stated that underlying inflation is near 2 per cent, wage pressures are broadening, and higher energy costs could spread from wholesale to consumer prices. He argued that the BOJ should act pre-emptively to prevent sharper rate increases in the future.

However, markets reacted with caution, as the yen weakened sharply after the decision. This raises questions about whether Japan's gradual tightening will be sufficient to offset inflation and exchange-rate pressures.