That all changed this week, as the global economic landscape shifted dramatically. Twelve national governments released important inflation figures and national central banks made key monetary policy decisions. Japan May inflation rose more than expected to surprise economists, and China held its loan prime rates steady. At the same time, Sweden and the UK experienced changes in public inflation expectations and policy interest rates, respectively. The week was topped off by news of a surprising rise in European consumer confidence, and an escalation in Middle East geopolitical tensions.
Japan, which has grappled with mild consumer inflation for decades, saw its core Consumer Price Index (CPI) jump to 3.7% y-o-y in May from 3.5% in April. This jump was larger than economists anticipated and is a clear indication of ongoing inflationary forces in our economy. Analysts see this increase as a positive sign of the demand environment. Second, it would encourage the Bank of Japan to conduct deeper policy debate on appropriate monetary policy.
China’s lending environment remained stable, as the People’s Bank of China (PBoC) kept its loan prime rates unchanged. The one-year loan prime rate is still unchanged at 3.00%, and the five-year LPR at 3.50%. This decision is consistent with market expectations and is a reflection of the central bank’s approach taking one careful step at a time through a recovering economy.
For example, Sweden’s latest economic indicators reflected a fall in inflation expectations over the course of the second quarter. The one-year and five-year CPIF inflation expectations fell to 2.0% y-o-y, from 2.3% and 2.2%, respectively. Swedish consumers are looking forward to at least a bit slower pace of price increases. This steep decline has serious implications for future monetary policy decisions.
The Bank of England (BoE) held its bank rate steady in a split vote of 6-3, with three members advocating for a rate cut. Despite the uncertain economic outlook, the BoE strongly reiterated their stance for a gradual approach to tightening monetary policy. “A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate,” stated a BoE representative.
On hiking rates, today, Denmark will publish its consumer confidence index. This data will provide unique insight into how Danish households are faring amid persistent economic turbulence. The Euro area remains mired in consumer confidence debilitating malaise. This decrease has now stretched for seven consecutive months since last October. Instead, after several months of decline, a modest rebound was seen in May, which should have persisted into June.
Norges Bank, Norway’s central bank, shocked the markets by unanimously lowering its policy rate by 25 basis points. This latest cut lowers the maximum deposit rate to 4.25%. The central bank noted that “the economic outlook is uncertain, but if the economy evolves broadly as currently projected, the policy rate will be reduced further in the course of 2025,” indicating a cautious stance on future rate adjustments.
In Switzerland, the Swiss National Bank (SNB) opted not to raise rates. At the same time, on March 16, they reduced their policy rate by 25 basis points to zero percent. The SNB expressed its awareness of the challenges related to negative interest rates, stating, “We would not take the decision to go negative lightly. We are well aware of all challenges related to negative interest. As a central bank we can never exclude it.”
The economic pressures on the UK were obvious too as UK periphery spreads widened against Germany. The 10-year Italian spread even shot up over 100 bps. This trend serves as a stark reminder of the persistent risks to fiscal sustainability across Europe.
As Congress detonated their debt ceiling crisis, tensions flared in the Middle East. The war between Israel and Iran has just entered into day seven. U.S. President Donald Trump has said that the U.S. will get involved, but hadn’t yet decided how or in what way, with a decision expected within two weeks. Analysts fear that Iran might disrupt oil and natural gas markets by blocking shipping routes through the Strait of Hormuz, raising global energy price concerns.
This week’s vivid relief effort came straight from the back-pages of diplomacy as Germany, France and Britain held their first face-to-face negotiations with Iran in Geneva. These talks are focused on easing ongoing friction over Iran’s nuclear development and regional behavior.