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(Bloomberg) — Three of the world’s largest central banks moved interest rates in different directions this week as a long-awaited, but potentially short-lived, divergence in monetary policies deepens.

The Bank of Japan kicked off the action on Wednesday by unexpectedly hiking as Governor Kazuo Ueda pressed ahead with his push to lift his benchmark clearly away from zero. Then came the Federal Reserve’s decision to stay on hold yet signal of a cut in September, followed on Thursday by the Bank of England’s first reduction since the start of the pandemic.

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Coronavirus-era supply-chain shocks have now largely washed through global economies and inflation is at or approaching targets. Most leading central bankers, consequently, are shifting focus to preserving economic growth and employment while Japan again plays the outlier.

This week’s decisions are keeping investors busy with plenty of assets moving in opposite directions.

“Different central banks are looking at broadly the same story and coming to different conclusions about what to do with policy,” said James Pomeroy, a global economist at HSBC Holdings Plc. It “makes meeting-to-meeting calls harder for markets.”

For now, domestic factors are in the driving seat, meaning the pace and scale of rates moves will vary across developed economies, though the divide may not last long. Indeed, economists at JPMorgan Chase & Co. envisage “the most synchronized policy easing cycle” in history outside of recessions.

“There may be a widening gap in the timing of first cuts,” said Roger Aliaga-Diaz, chief Americas economist at Vanguard Group Inc. But “we don’t see a divergence in the projected path of central bank rates over the next few years. Once the Fed starts cutting rates, most major central banks will be moving in lockstep.” 

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What Bloomberg’s Strategists Say…

“The Bank of Japan’s long-awaited decisive shift of rates into positive territory marks a key moment in the post-pandemic cycle. Global macro imbalances that built up as the BOJ stayed ultra-loose now threaten to unwind as the Fed, ECB and BOE begin to move in the opposite direction to Japan. The yen, dollar, global rates and equities all face a heightened risk of greater volatility.”

— Simon White, macro strategist

After the BOJ lifted rates by 15 basis points and announced details of a planned reduction in government bond buying, the yen strengthened to its strongest since March. It also put a target of 140 versus the dollar into the crosshairs of traders seeing tighter policy ahead. 

By contrast, the dollar this week displayed signs of softening against many rivals on the prospect of cheaper rates and as the US economy slows. 

Meantime, the mounting expectation that the Fed will act in September sent Treasuries rallying, enabling July to record a third straight month of gains, the longest winning streak in three years. The yield on 10-year notes slumped below 4% for the first time since February on Thursday as investors rushed to price in three Fed cuts this year.

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Moving the other way, the yield on two-year Japanese notes this week hit a 15-year high.

As for stocks, Japan’s Topix index tumbled the most since 2020 on Thursday. The US’s S&P 500 Index advanced in the best Fed-day session since July 2022 before tumbling nearly 1.5% on Thursday amid weak economic data and a surge in bonds.

In the UK, the pound and gilt yields fell as the BOE cut its key rate by a quarter point. Officials stressed they would be cautious about further easing, offering no specific guidance on where rates may settle nor of the speed of moves needed to get there. Sterling remains the best-performing Group-of-10 currency against the dollar so far this year, largely on bets UK rates will remain high compared to peers.

“Now that developed-market central banks are embarking on their respective cutting cycles, rate differentials should increasingly become an important driver for FX returns going forward,” said Wanting Low, a strategist at Morgan Stanley, who is bullish on the pound versus the euro on the prospect of differing policies. 

The deviation began a few months ago, when the Bank of Canada and European Central Bank joined their peers in Switzerland and Sweden in cutting rates. Back then, Fed Chair Jerome Powell was still warning of inflation risks after an ill-fated December pivot toward easing backfired after fresh price pressures emerged at the start of 2024. 

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Now, Powell is signaling rate cuts once more if inflation continues to moderate. 

“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell told reporters after he and his colleagues left the federal funds rate in a range of 5.25% to 5.5% — the highest level in more than two decades. 

Yet underscoring uncertainty in the outlook, Powell told reporters he “can imagine a scenario in which there would be everywhere from zero cuts to several cuts” over the remainder of the year, “depending on the way the economy evolves.”

BOE Governor Andrew Bailey cautioned on cutting “too quickly or by too much.” 

The outlook for jobs in the US is now key, putting a spotlight on employment data for July that’s due for release on Friday and is forecast to show a slowdown. Separate figures Thursday showed initial applications for US unemployment benefits jumped to the highest level in almost a year.

Despite the recent splits, the ability of some central banks to break comprehensively with the world’s largest economy is limited. As Canada eases, for example, the resulting gap with US policy increases the potential for downward pressure on the Canadian dollar.

Some investors are looking through near-term divergence in timing.

“Rather than try and position for how much the Fed cuts relative to the BOE or the ECB, I prefer to position for the fact that growth will fall, unemployment will rise, and rates cuts — not a soft landing — will come in all of those markets,” said James Athey, a portfolio manager at Marlborough Investment Management. 

—With assistance from Elena Popina and Carter Johnson.

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