ECB, Fed and BoJ diverge on policy

Central banks are supposed to move in loose formation. Right now they do not. The Federal Reserve, the European Central Bank and the Bank of Japan all left policy unchanged in the last two weeks of April, but the reasons underneath those pauses are drifting apart fast. That matters because when the same oil shock hits three big economies in three different ways, rates, currencies and bond markets stop telling one clean global story. (federalreserve.gov) ### What changed last week? The clean version is this: the ECB held its three policy rates unchanged on April 30, the Fed held the federal funds target at 3.5%-3.75% on April 29, and the BoJ’s latest guidance still points to an overnight call rate around 0.75% after its April outlook update. Sam(federalreserve.gov)ensified. The Fed says inflation moved up and uncertainty jumped. The BoJ is still watching whether wages and prices are feeding each other in a durable way. (ecb.europa.eu) ### Why is oil the thing tying this together? Because the Middle East conflict turned energy back into monetary policy. Christine Lagarde said the war shut down the Strait of Hormuz — the world’s key energy chokepoint — and the ECB’s March meeting account said Brent had already surged above $(ecb.europa.eu)usehold spending and business margins all at once. (ecb.europa.eu) ### Why does the ECB look the most hawkish? Because Europe gets the inflation hit more directly. The ECB’s April 30 statement kept rates steady, but the tone was not dovish — policymakers said inflation upside risks had intensified. The March meeting account went further: markets were pricin(ecb.europa.eu)sically, traders stopped assuming “oil spike means rate cuts” and started thinking “oil spike could delay cuts or even force tightening.” (ecb.europa.eu) ### Why isn’t the Fed saying the same thing? Because the Fed still has a two-sided problem. Powell said higher oil prices are pushing up headline inflation, with total PCE at 3.5% in March and core PCE at 3.2%. But he also pointed to softer labor demand and a 4.3% unemployment rate. So the Fe(ecb.europa.eu)ough to justify easing later. That is why the March median policy-rate projection still implied some decline to 3.4% by year-end, even before the latest oil move. (federalreserve.gov) ### Where does Japan fit? Japan is the odd one out — but in the opposite direction from the old deflation story. The BoJ now expects core CPI to run 2.5%-3.0% in fiscal 2026, explicitly helped by higher crude prices and continued pass-through from wages into prices. Policy is still easy by globa(federalreserve.gov)naled for fiscal 2026, the case for more tightening stays alive. (boj.or.jp) ### Why do currencies matter so much here? Because policy gaps become FX gaps. A relatively hawkish ECB can support the euro. A Fed stuck between inflation and slowing growth can leave the dollar pulled in both directions. A BoJ that keeps inching away from zero can keep changing the yen funding story. Once those paths separat(boj.or.jp)ying more of the adjustment. The catch is that FX moves then feed inflation back into each economy differently. (ecb.europa.eu) ### What should markets actually watch now? Not just the next rate meeting. Watch oil, wage settlements and inflation expectations. Powell explicitly said near-term inflation expectations have risen with oil. The ECB is watching whether the energy shock stays temporary or seeps into broader (ecb.europa.eu). Same shock — three reaction functions. (federalreserve.gov) ### Bottom line The big story is not that one central bank blinked. It is that the shared post-pandemic script has broken. Europe is more exposed to imported energy inflation, the US is still balancing inflation against softer labor demand, and Japan finally has enough wage-and-price momentum to(federalreserve.gov) have to price three different worlds at once. (ecb.europa.eu)