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Central Banks Diverge as Rate Hiking Cycles Near End, US Fed Remains Hawkish

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Big Central Banks Approach End of Rate Hiking Cycles

Central banks around the world are nearing the conclusion of their rate hiking cycles, leading to surprises in the market as their approaches to monetary tightening differ. While the US Federal Reserve has dismissed hopes for a prolonged pause and indicated the possibility of further rate hikes to control inflation, the Bank of England and the Swiss National Bank have chosen to leave rates unchanged. The Bank of England cited signs of economic slowdown, while the Swiss National Bank explained its decision by pointing to inflation remaining within the target range.

According to data, nine developed economies have collectively raised rates by 3,965 basis points in this cycle, with Japan being the only exception. Below is a breakdown of where key central banks stand in terms of the extent of rate hikes:

United States:
The Federal Reserve held interest rates at 5.25%-5.50% but did not rule out the possibility of further rate hikes this year to manage inflation. However, market uncertainty remains, with futures pricing suggesting a 50% chance of another quarter-point hike by the end of the year.

New Zealand:
The Reserve Bank of New Zealand raised its cash rate to 5.5%, the highest in 14 years, and has maintained it at that level. The bank has delayed its plan to begin reducing borrowing costs until 2025.

Britain:
The Bank of England decided to keep interest rates at 5.25%, citing indications of economic slowdown. However, the bank has not ruled out the possibility of future rate hikes. Following the announcement, sterling experienced a sharp decline, and interest rate futures suggest a 70% chance that rates will remain unchanged in November.

Canada:
The Bank of Canada Governor, Tiff Macklem, expressed concerns that monetary policy might not be tight enough to reach the desired target. The bank decided to keep its key rate at 5%, but it suggested the possibility of additional hikes if inflation persists. Inflation has exceeded the bank’s 2% target for 27 consecutive months.

Euro Zone:
The European Central Bank (ECB) raised its key rate to 4%, the highest level since the introduction of the euro, signaling a potential end to its fight against inflation. Economists believe the ECB will keep rates on hold until at least July 2024.

Norway:
The Norges Bank raised its key rate to 4.25%, with another hike expected in December. Despite unexpected declines in core inflation, underlying price growth remains above the bank’s 2% target.

Sweden:
Sweden’s central bank raised its key policy rate to 4% as part of efforts to bring inflation back to 2%. The country’s currency has depreciated against the euro, supporting the case for rate increases. However, policymakers face challenges due to a significant economic slowdown, with the government expecting a 0.8% contraction this year.

Australia:
The Reserve Bank of Australia considered a 25 basis point hike but ultimately left rates unchanged at 4.1%. The bank’s new Governor, Michele Bullock, is expected to maintain a similar stance in their upcoming announcement.

Switzerland:
The Swiss National Bank surprised markets by keeping interest rates at 1.75% after three months of inflation within the target range. However, SNB Chairman Thomas Jordan did not rule out the possibility of further rate hikes if necessary to maintain inflation below 2%.

Japan:
The Bank of Japan, known for its dovish stance, is expected to make its latest decision soon. While the consensus suggests no changes, some economists predict that the central bank will end its negative rates policy next year.

As central banks approach the end of their rate hiking cycles, the market remains uncertain about the future trajectory of monetary policy. While some central banks are signaling further tightening, others are opting for a more cautious approach amid concerns of economic slowdown and easing inflation pressures.

More detail via Investing.com UK here… ( Image via Investing.com UK )

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