Central banks are converging on the solution to the prolonged restrictive monetary policy with higher interest rates for a longer period of time.

In this context, the upcoming decisions of central banks in the developed world are of pivotal importance for the global economy.

Borrowing costs for 7 of the world’s 10 most traded currencies – including the dollar and the euro – will be set in the coming days.

In fact, there are no safe predictions about the decisions that monetary policy makers will be asked to make.

Case in point is the European Central Bank, whose officials appear divided ahead of Thursday’s meeting in Frankfurt.

However, analysts agree that even central banks that keep interest rates unchanged, such as the Fed, will remain poised for further tightening to tackle high inflation.

“Higher (interest rates) for longer” was after all the motto of policymakers who spoke last month at the Fed conference in Jackson Hole. And while on the other side of the Atlantic the start of the monetary tightening cycle has differed, a more equanimous stance is emerging at this stage as the end of interest rate hikes looms.

The ECB’s dilemma

The decision on the Eurozone is expected to be made on a razor’s edge. Economists appear divided on whether to decide on another rate hike or a pause.

Markets’ bets on a 10th straight rate hike are now at 40% from 60% last month after data showed a weakening German economy. An eventual 25 basis point hike to take the key rate to 4% has not been ruled out, but it now looks more likely towards the end of the year.

The main challenge, however, for Christine Lagarde and her colleagues is to convince markets that they will keep policy as tight as necessary to tame prices while economic growth falters.

As the Frenchman Francois Villeroy de Galhau, a member of the ECB’s Board of Directors, argued, the time that interest rates will remain high matters “at least as much” as the actual level of interest rates. Now, he even insists that “duration matters more”.

The Fed’s optimism

Next Wednesday, the Fed takes over. Its officials are more optimistic that they can contain inflation without causing a serious blow to the economy. Bond markets are giving almost no chance of a rate hike in the upcoming meeting, and economists agree that rates will remain steady after Fed leaders gave clear signals that they intend to freeze any hikes this month.

Amid signs of a gradual easing of price pressures and an easing of the labor market, Fed officials do not want to risk the prospect of a “soft landing” by raising interest rates too much.

The focus of the meeting on 19-20 September will be the updated economic forecasts which are expected to show another rate hike by the end of the year while keeping interest rates close to their peak throughout 2024 to ensure the return of inflation to the 2% target set by Western banks.

The BoE and the rest of Europe

However, the Bank of England also appears divided, amid fears of a recession due to high inflation, with 5 of the 9 members of the monetary policy committee arguing that the level of the key interest rate that has been set at 5.25% is high enough.

Governor Andrew Bailey said last week that interest rates were “near the top of the cycle”.

The Swiss National Bank (SNB) is in a much better position. With inflation below the 2% ceiling, it may not be forced to raise rates next Thursday.

On the same day as the SNB, Norges Bank in Norway is expected to end rate hikes with a final rate hike of a quarter of a point. Sweden’s Riksbank, on the other hand, may raise borrowing costs again.

Japan’s lax politics

In Japan, there is a sense that new central bank governor Kazuo Ueda is preparing the ground for a normalization of policy.

Ueda said on Saturday that the Bank of Japan is likely to have enough information by the end of the year to judge whether wages will continue to rise – a key factor in deciding whether or not to change its ultra-loose policy.

While this may not lead to a policy change at the September 22 meeting, the last remaining negative rate among major economies appears to be on the way out.

Canada and Australia

Canada and Australia – both commodity-dependent economies – have already made their decisions in September and both now appear set for a period of steady interest rates, although they have signaled further hikes if necessary.

The Reserve Bank of Australia kept its key interest rate unchanged at 4.1% on September 5 as Governor Philip Lowe stepped down as inflation eased.

A day later, policymakers in Canada led by Governor Tiff Macklem kept the key interest rate at 5%, the highest level in 22 years. Given the downturn in the economy, they warned that price pressures are proving difficult to abate.