If the Federal Reserve does not cut interest rates for a day, will it be difficult for the rest of the world to cut rates?

The stickiness of US inflation has forced the market to significantly converge on the expected rate cut by the Federal Reserve, also generating a wide spillover effect on the monetary policies of global central banks.

On Thursday, the Bank of Indonesia unexpectedly announced a 25 basis point rate hike, raising the benchmark interest rate to 6.25%, marking the first rate hike of the year. Last month, the Central Bank of Taiwan also unexpectedly raised its benchmark discount rate by 12.5 basis points to 2.00%.

James Knightley, Chief International Economist at Dutch International Group, stated:

The inflation dilemma in the United States has global implications that other central banks cannot ignore. Especially if the Federal Reserve is unable to cut rates quickly, it may trigger a strengthening of the US dollar, putting pressure on the European economy and limiting the ability of other central banks to cut rates. In addition, there are concerns that the situation of US inflation may spread to Europe.

US Inflation Pressure Spreading Globally

Recent US inflation data indicates that there is still a considerable distance to go before inflation falls back to the Federal Reserve's 2% target.

The March PCE data released last week showed that the year-on-year growth rate of the core PCE price index, the Fed's preferred inflation target excluding food and energy, was 2.82% in March, higher than the expected 2.7% and a revised value of 2.8%. Calculated on a three-month annualized basis, the core PCE price index surged to 4.4%.

The Federal Reserve's persistent battle against inflation has exacerbated the difficulty for other central banks to shift towards easing. If other central banks cut rates more aggressively than the Federal Reserve, they may harm their own economies due to the impact on exchange rates, import costs, and inflation.

For example, the European Central Bank and the Bank of England believe that they do not face as severe inflation issues as the United States, indicating that they have more room for rate cuts. While investors expect the Federal Reserve to cut rates for the first time in November, senior officials at the European Central Bank and the Bank of England have hinted at rate cuts this summer.

ECB President Lagarde stated in Washington this month that the "roots and driving forces" of inflation in the Eurozone and the United States are different - Europe is more influenced by energy costs, while the US is mainly affected by fiscal deficits. Bank of England Governor Andrew Bailey also believes that the inflation dynamics in Europe are "somewhat different" from the US.

However, the changes in the futures market demonstrate the ongoing impact of the US inflation issue on the global economy.

At the beginning of the year, when US inflation seemed to be trending downwards, market expectations for rate cuts were optimistic. However, the current market expects the Bank of England to cut rates by 44 basis points this year, a significant convergence from 172 basis points at the beginning of the year and 56 basis points two weeks ago.

Nathan Sheets, Chief Economist at Citigroup, stated:

If the Federal Reserve continues to wait and see, it will be more challenging for the European Central Bank to cut rates significantly.

Marcelo Carvalho, Global Head of Economics at BNP Paribas, also believes that the European Central Bank is neither entirely "dependent on the Federal Reserve" nor "unrelated to the Federal Reserve."

Diverging Views within the ECB - Hawks and Doves Holding Firm

Currently, there is a divergence within the European Central Bank regarding the tolerance for the interest rate gap with the Federal Reserve.

François Villeroy de Galhau, the Governor of the Bank of France, stated that he expects to continue cutting interest rates "pragmatically" after June. However, Robert Holzmann, the Governor of the Austrian National Bank, warned that it would be difficult to maintain a significant interest rate differential with the Federal Reserve.

Since the beginning of the year, the euro has fallen by 3% against the US dollar, hovering just above $1.07. Investors anticipate the euro to depreciate further to parity with the dollar.

According to the latest research from the European Central Bank, a scenario of currency depreciation could push inflation in the euro area up by around 0.3 percentage points in the next year. ECB Vice President Luis de Guindos stated this week that the impact of exchange rate movements needs to be considered in the future.

However, some ECB officials believe that if the more hawkish Federal Reserve tightens global financial conditions, it would provide more reasons for the euro area and other regions to cut interest rates.

Fabio Panetta, the Governor of the Bank of Italy, stated last Thursday:

"A tightening of US policy would have a negative impact on inflation and output in the euro area, which could strengthen rather than weaken the case for rate cuts."

BNP Paribas estimates that if the impact of the US market raises European bond yields by 0.5 percentage points, the European Central Bank would need to cut rates by an additional 0.2 percentage points to offset the tightening financial conditions. Similarly, the Bank of England would need to cut rates by an additional 0.13 percentage points