After nearly two years of aggressive monetary tightening, the world’s largest central banks are pausing to evaluate their next moves. The Bank of England announced on Thursday that it would be leaving interest rates at a 15-year high, following the U.S. Federal Reserve’s decision to also keep rates unchanged.
This shift in focus within financial markets comes as economic growth slows and inflation begins to ease. In total, nine developed economies have raised rates by a combined 3,965 basis points since September 2021, with Japan being the only holdout.
Here is a breakdown of where central banks currently stand, from the most hawkish to the most dovish:
1) United States:
The Federal Reserve opted to keep rates on hold at 5.25%-5.50% on Wednesday, as policymakers grapple with determining whether financial conditions are already tight enough to control inflation. There is uncertainty about whether the economy, which continues to outperform expectations, may require further restraint. The decision brought hope to the markets that the Fed is finished with monetary tightening.
2) New Zealand:
New Zealand’s central bank was one of the first to initiate rate hikes in 2021. However, the tightening that pushed the key cash rate to a 15-year high of 5.5% in May appears to have come to an end as the economy softens. Market expectations imply only a 10% chance of another hike at the Reserve Bank of New Zealand’s next policy meeting in late November.
The Bank of England chose to maintain interest rates at their 15-year peak on Thursday, emphasizing that inflation risks are skewed to the upside. Additionally, the bank predicts that the UK economy will not grow at all in 2024. Despite this decision, rate cut predictions did not significantly change, with markets still pricing in a considerable chance of rate cuts starting in August 2024.
The Bank of Canada held its key overnight rate at 5% on October 25. Market pricing suggests that investors expect the pause to continue for some time. However, Governor Tiff Macklem stated on October 30 that the central bank is prepared to raise rates further if inflation persists.
5) Euro Zone:
Last week, the European Central Bank decided to keep its key rate at 4%, noting that the latest data indicates a gradual decline in inflation toward its 2% target. As inflation rapidly falls and evidence of a slowdown mounts, investors have started to speculate about rate cuts. Money markets are now pricing in a 25 basis point rate cut by April.
The Norges Bank left its key rate unchanged at 4.25% on Thursday and reiterated its intention to raise rates in December. Inflation in Norway fell more quickly than expected in September. However, the Norges Bank stated that staying on hold would require more assurance that underlying price pressures are subsiding.
Sweden raised its main interest rate to 4% in September but faces a difficult decision regarding what should come next. Economists surveyed by Reuters predict that Sweden’s economy will contract by 0.7% in 2023. Swedish inflation, excluding volatile energy costs, reached an uncomfortably high rate of 6.9% in September.
There is an increasing chance of a rate hike from the Reserve Bank of Australia, following recent data showing a rebound in house prices to near record highs, and a recommendation from the International Monetary Fund to tighten monetary and fiscal policies to curb inflation. Markets currently price in a nearly 70% probability of the RBA raising rates by a quarter point to 4.35% on November 7.
Futures markets indicate that the Swiss National Bank (SNB) will maintain its policy rate at 1.75% in December before deciding on the next steps. The Swiss franc reached its highest level against the euro since 2015 on October 20 before retreating slightly. The strong franc has helped the SNB control inflation, which stood at 1.7% in October. However, it also poses a threat to Swiss exports at a time when the economy is stagnant.
The Bank of Japan (BOJ) recently decided to keep its ultra-low interest rates steady but made a small adjustment to its controversial 1% cap on the 10-year bond yield, allowing long-term borrowing costs to rise slightly more. The BOJ also raised its price forecasts, projecting that inflation will exceed its 2% target this year and next. Investors were underwhelmed by the change to the yield cap and it took strong warnings about currency intervention from Japan’s top currency diplomat to halt the slide of the yen.
As central banks around the world pause to assess the state of their respective economies, the focus now shifts to when they will begin easing policy. The decisions made by these institutions will have significant implications for global financial markets and the broader economy.
More detail via Daily Mail Online here… ( Image via Daily Mail Online )