Talks in Sintra highlight the Central Bank Playbook has had a makeover
The annual ECB Central Banking Forum in Sintra provided plenty of lessons on how central banks across Asia and the West are navigating the shifting economic landscape.
The three key themes emerged out of the annual ECB conference in Sintra:
Asia and the West have different responses to the trade shock
The decline of US dollar dominance will be slow
Reliance on the neutral rate offers diminishing returns
The European Central Bank’s annual panel brought together leaders from the ECB, Bank of England, US Federal Reserve, Bank of Japan, and Bank of Korea to discuss risks central banks are facing when conducting monetary policy. Of note, three key themes stood out: how trade tensions, currency dynamics and neutral rates are shaping monetary policy outlooks. We see increasing divergence in policy paths and priorities, particularly between Asian and Western economies.
Comments from the BoJ’s Ueda and BoK’s Rhee underscored a growing divergence in how Asian and Western economies are responding to trade-related shocks. For Asia, the need for accommodative policy is not only evident—it is strategic. Rhee’s emphasis on a pre-emptive approach reflects the structural reality that Asian economies, with their large exposure to export markets and China, are more vulnerable to imported deflation and a slowdown in growth. With growth tracking below potential and inflation risks tilted downward, early rate cuts across the region, as we have previously argued, will help cushion against global volatility. This reinforces our view that Asian monetary policy will likely remain structurally looser than in the West.
By contrast, policymakers in Europe, the UK, and the US appear to be adopting a more reactive stance, partly because of uncertainty around whether the impact of tariffs is transitory or not. Fed Chair Powell’s framing of the pause as a “prudent” measure reflects uncertainty about how large and persistence tariff effects will be and how they transmit through economies.
The second key theme was that moving any shift away from the US dollar as a reserve currency will be a slow-moving process catalysed by ‘uncertainty’ and ‘unpredictability’ and braked by the absence of a viable alternative. In a speech in May, ECB President Lagarde noted that the euro could play a bigger role as a reserve currency. To earn the right to do so, though, in her view Europe needs a stronger geopolitical and legal foundation as grows its capital markets through a strong European economy. None of this will happen overnight.
Rhee added to the theme of a more gradual decline in the USD’s dominance by arguing that recent strength in the Korean won reflected a reversion to its fundamental value as domestic political uncertainty fades, rather than being mostly about the USD’s decline. He also pointed out that hedging ratios had provided strength to the won. This has also been seen in the Taiwanese dollar and Japanese yen, both currencies benefitting from domestic fund managers increasing their hedging ratios.
The final key theme was the role of neutral interest rates in today’s monetary policy frameworks. Across the panel, there was broad agreement that the uncertainty surrounding neutral rate estimates has widened considerably. Lagarde argued the concept of neutral also becomes less relevant in an environment of major shocks. In addition, the closer policy is to the uncertain estimates of neutral, the less of a guide to future direction it becomes.
As a result, central banks appear to be treating neutral not as a firm policy anchor, but as a guiding light, helping to gauge direction. There was also consensus that policy rates are not currently restrictive across all jurisdictions except the US and that estimates of neutral have risen in the post-pandemic era, an observation we have been making for some time.
Interestingly, this contrasts with recent developments in Australia, where the policy rate is still above most of the RBA’s model-based estimates of neutral. The panel’s discussion suggests that the RBA may be something of an outlier. This divergence highlights a broader challenge: as global shocks become more frequent and complex, reliance on slow-moving and uncertain estimates like the neutral rate may offer diminishing returns. For central banks, this means policy will need to remain adaptive, data-dependent, and increasingly open to qualitative judgment.
The Sintra panel highlighted how risks are being interpreted by central banks across regions. Asian central banks, facing trade-driven deflation and sub-trend growth, are acting pre-emptively. Western policymakers remain more reactive, reflecting uncertainty around tariff impacts. While dissatisfaction with dollar dominance is growing, structural change will be slow, with the euro’s ascent still nascent. Though neutral rates remain a key reference point, their practical use is limited in today’s shock-prone environment, and when policy is already in the ballpark of neutral. As global conditions fragment, central banks are moving toward a more flexible, adaptive policy approach.
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