“Restrictive for longer” is now the mantra as monetary policymakers seek to bring inflation reliably to target.
Though inflation is trending downward globally, major central banks haven’t relaxed their restrictive stances. Their price stability mandates and their credibility are at stake.
They may diverge in their approaches, but most developed market central banks have shifted to a new monetary policy mantra: After more than a decade of “lower for longer,” it’s now “restrictive for longer.” Interest rates may remain uncomfortably high until inflation data is comfortably trending toward target (and central banks are acutely dependent on the data).
Investors may be coming to accept this outlook, given market indicators such as interest rate futures and sovereign yields. That said, markets have demonstrated a tendency to romance rate cuts at the first hint of dovish signals from central bankers – but we are cautious about underestimating their resolve. The concept of staying restrictive for as long as necessary appears entrenched.
With their latest policy decisions, the U.S. Federal Reserve, European Central Bank, and Bank of England continued along restrictive paths, though their specific actions and signals varied. The Bank of Japan is equally focused on price stability, but with the aim of ending decades of disinflation.