After a period of aggressive monetary tightening, the world’s largest central banks are now pausing to assess their next steps. The Bank of England (BoE) recently announced that it would maintain interest rates at a 15-year high, following in the footsteps of the U.S. Federal Reserve, which also decided to keep rates unchanged.
With global economic growth slowing and inflation easing, the focus in financial markets has shifted to when central banks will start easing their policies. Over the past two years, nine developed economies have raised rates by a combined 3,965 basis points (bps) since September 2021. Japan remains the only exception, with a more dovish approach.
Let’s take a closer look at where some of these central banks stand:
The U.S. Federal Reserve decided to keep rates on hold at 5.25%-5.50% on Wednesday. Policymakers are currently grappling with whether financial conditions are already tight enough to control inflation or if the robust economy, which continues to outperform expectations, requires further restraint. Market sentiment was positive, with hopes rising that the Fed is done with monetary tightening.
New Zealand’s central bank was among 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, given the softening of the economy. Market expectations now suggest 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, on the other hand, maintained interest rates at their 15-year peak and emphasized that inflation risks were skewed to the upside. It also predicted that the UK economy would not grow at all in 2024. Despite this decision, rate cut predictions have barely changed, with the market still pricing in a substantial chance of rate cuts from August 2024.
The Bank of Canada held its key overnight rate at 5% on October 25. Market expectations indicate that investors foresee the pause in rate hikes continuing for some time. However, Governor Tiff Macklem stated that the central bank is prepared to raise rates further if inflation persists.
The European Central Bank (ECB) maintained its key rate at 4% last week, noting that the latest data suggests inflation is slowly coming down to its 2% target. In response to the falling inflation and signs of a slowdown, investors have begun betting on a rate cut. Money markets currently price in a 25 basis points rate cut by April.
Norway’s central bank, the Norges Bank, left its key rate unchanged at 4.25% on Thursday and reiterated its intention to raise rates in December. However, the bank also emphasized that staying on pause would require more evidence that underlying price pressures are subsiding, particularly after inflation in Norway fell faster than expected in September.
Sweden raised its main interest rate to 4% in September but now faces a difficult decision regarding future moves. Economists polled by Reuters predict that Sweden’s economy will shrink by 0.7% in 2023. Furthermore, Swedish inflation, excluding volatile energy costs, stood at an uncomfortably high 6.9% in September.
The Reserve Bank of Australia (RBA) may be on the brink of an imminent rate hike. House prices in Australia have rebounded to near record highs, and the International Monetary Fund has recommended tightening monetary and fiscal policies to curb inflation. Financial markets are currently pricing in a nearly 70% chance that the RBA will raise rates by a quarter point to 4.35% on November 7.
The Swiss National Bank (SNB) is expected to hold its policy rate at 1.75% in December, according to futures markets. The Swiss franc recently reached its highest level against the euro since 2015, which has helped the SNB control inflation at 1.7% in October. However, the strong franc poses a threat to Swiss exports at a time when the economy is stagnating.
Lastly, the Bank of Japan (BOJ) decided to keep ultra-low interest rates steady but adjusted its controversial 1% cap on the 10-year bond yield to allow long-term borrowing costs to rise. The BOJ also raised its price forecasts, projecting that inflation will well exceed its 2% target this year and next. Investors, however, were underwhelmed by the change in the yield cap and it took pointed warnings about currency intervention from Japan’s top currency diplomat to halt the slide in the yen.
With central banks around the world pausing their rate hikes, the focus is now shifting towards potential easing measures as economic growth slows and inflation rates ease. These decisions will play a crucial role in shaping the future economic landscape both domestically and globally.
More detail via Reuters here… ( Image via Reuters )