On March 20, 2024, U.S. Federal Reserve Chairman Powell held a press conference after holding a two-day interest rate policy meeting in Washington, USA.
Elisabeth Franz | Reuters
Central banks around the world reached a critical point this week, with Switzerland becoming the first major economy to cut interest rates and the Bank of Japan raising rates for the first time in 17 years.
Markets are still trying to assess when most of the world’s most influential central banks will begin to ease the tight monetary policy stance they have adopted over the past two years to curb high inflation.
Bank of Japan
The exception is the Bank of Japan, which has maintained negative interest rates for 17 years to stimulate a stagnant economy and drive up inflation. That experiment, along with unconventional policies such as yield curve control and qualitative and quantitative easing, finally came to an end on Tuesday.
Japan is expecting a sharp rise in wages following ongoing negotiations between unionized workers and Japanese companies, a reference to the country’s highly centralized economy. Bank of Japan policymakers expect rising wages to stimulate domestic demand, further pushing up inflation.
Tomoya Masanao, co-director of Pimco Japan, said that the mid- to long-term impact of this shift may be more important than market expectations, and the key question is where Japan’s inflation rate will stabilize after the epidemic.
“Although the Bank of Japan reiterated its commitment to the 2% inflation target, we believe it is unlikely that the Bank of Japan will maintain easy monetary policy indefinitely to firmly achieve the 2% target,” Masanao said.
“The Bank of Japan’s medium-term policy adjustments are likely to involve reducing its balance sheet and raising interest rates. Despite possible headwinds from a global economic slowdown and interest rate cuts by other major central banks, the Bank of Japan remains prepared to slowly but surely reduce its oversized balance sheet. yes. “
swiss national bank
The Swiss National Bank surprised markets on Thursday by cutting its main policy rate by 0.25 percentage points to 1.5%, and said inflation is likely to remain below 2% for the foreseeable future.
Switzerland’s headline and core CPI inflation have been below that level since June and May 2023 respectively, with the central bank lowering its year-end forecast to 1.4%, then 1.2% and 1.2% in 2025. 1.1% in 2026.
The Swiss National Bank also pointed out that the strength of the Swiss National Bank Swiss franc influenced its decision to relax policy.
“Sustained currency strength poses deflationary risks to the Swiss economy if inflation falls below 2%,” strategists at BCA Research said in a note on Friday.
“Moreover, a strong Swiss franc can reduce the competitiveness of Swiss exports. This is especially true given that the Swiss National Bank has highlighted weak global economic activity as the main risk.”
Fed
The Federal Reserve on Wednesday kept interest rates steady at a range of 5.25%-5.5% as expected and reiterated its guidance for three 25 basis point interest rate cuts throughout the year.
Market futures are pricing in a roughly 70% chance that the Federal Reserve will cut interest rates for the first time at its June 11-12 meeting, according to CME Group’s FedWatch tool. Despite expectations for strong economic growth, falling unemployment and slightly higher-than-expected core inflation, interest rate cut expectations persist, prompting the central bank to slightly increase its forecast for long-term policy rates.
“The small increase in long-term policy rate forecasts is both negligible and noteworthy. It is negligible because market expectations are already much higher, but noteworthy because it reinforces the market’s recent view that the rate-cutting cycle is likely to be longer than Shallower than initially expected,” Whitney Watson, co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, said in a note.
However, GSAM believes that despite “bumps in the road to inflation”, major central banks are still expected to cut interest rates in the coming months.
bank of england
The Bank of England also held interest rates steady at 5.25% on Thursday but sent a decidedly dovish signal as two dissenters on the Monetary Policy Committee abandoned a vote to raise rates by another 25 basis points in an 8-1 vote. A share voted in favor of keeping rates unchanged, while one member voted in favor of a cut.
Governor Andrew Bailey also said the fundamentals for a rate cut were “moving in the right direction”, with headline UK inflation falling faster than expected, the labor market cooling and wage growth slowing.
Deutsche Bank British economist Sanjay Raja emphasized that the rate cut will still keep the Bank Rate in restrictive territory, but as inflation and wage pressures decline, the change in rhetoric sets the stage for the Monetary Policy Committee to start adjusting restrictive levels. foundation.
“The evidence needed to cut interest rates is less clear. While the MPC noted that “further accumulated evidence of the persistence of inflation is needed” to change the stance of monetary policy, the minutes also acknowledged that members “divided on the degree of evidence” that may Bank interest rates need to be lowered,” Raja pointed out.
Deutsche Bank is sticking to its call for a rate cut at its next meeting on May 9, but “just now” given questions about the size and scope of the evidence required. However, there is only a 25% chance that market futures are priced in, with most economists disagreeing between June and August.
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