
After Aggressive Rate Hikes, Major Central Banks Pause Action
LONDON (Reuters) – After nearly two years of aggressive monetary tightening, major central banks are pausing to assess their next steps.
The Bank of England recently maintained interest rates at a 15-year high, following the U.S. Federal Reserve’s decision to keep rates unchanged a day earlier.
Financial markets are now concentrating on when central banks might begin easing policies, given the slowdown in economic growth and a decline in inflation.
Since September 2021, nine developed economies have collectively raised rates by a total of 3,965 basis points, while Japan remains an outlier with its dovish stance.
Here’s a summary of current central bank positions, ranked from hawkish to dovish:
1) United States
The Federal Reserve decided to hold rates steady at 5.25%-5.50%, with policymakers weighing whether current financial conditions are sufficient to manage inflation or if further restraint is necessary due to the economy’s strong performance. Financial markets responded positively, signalling expectations that the Fed’s tightening phase may be over.
2) New Zealand
New Zealand’s central bank, one of the first to initiate rate hikes in 2021, has likely concluded its tightening cycle at a peak of 5.5% in May, as economic signs show a slowdown. The market now indicates only a 10% chance of another hike at the next RBNZ meeting in late November.
3) Britain
The Bank of England kept rates at their highest level in 15 years and highlighted upside risks to inflation. It projected no growth for the UK economy in 2024, and while expectations for rate cuts barely shifted, there remains a notable likelihood of reductions starting in August 2024.
4) Canada
The Bank of Canada held its key rate at 5% and market sentiment indicates that this pause will likely last. Governor Tiff Macklem noted that further rate increases are a possibility if inflation continues to be a concern.
5) Euro Zone
The European Central Bank maintained its key rate at 4% last week, with data suggesting a gradual reduction in inflation towards its 2% target. Given the rapid decline in inflation and signs of economic slowdown, investors are anticipating a rate cut, with money markets pricing in a 25 basis point reduction by April.
6) Norway
The Norges Bank kept its key rate steady at 4.25%, indicating future increases are possible in December. Despite September’s unexpected decline in inflation, the bank noted that staying on pause will require clearer signs that underlying price pressures are diminishing.
7) Sweden
Sweden raised its main interest rate to 4% in September but faces a challenging decision moving forward, particularly as the economy is expected to contract by 0.7% this year and inflation, excluding volatile energy prices, remained high at 6.9% in September.
8) Australia
The Reserve Bank of Australia may be on the verge of increasing rates following data indicating a recovery in house prices and recommendations from the International Monetary Fund to strengthen monetary and fiscal policies to combat inflation. Markets are suggesting a near-70% chance of a rate increase to 4.35% on November 7.
9) Switzerland
Futures markets predict the Swiss National Bank will hold its policy rate at 1.75% in December while deliberating its future course. The Swiss franc strengthened significantly but has mellowed after reaching its highest value against the euro since 2015 due to ongoing geopolitical tensions and economic stagnation.
10) Japan
The Bank of Japan maintained its ultra-low interest rates and adjusted its yield cap to allow long-term borrowing costs to rise slightly. It also raised inflation forecasts, indicating a likely overshoot of the 2% target in the near future. The modest changes failed to appease investors, especially after warnings from Japan’s currency diplomat aimed at curbing the yen’s decline.
As central banks navigate these economic challenges, the global market landscape remains dynamic, with significant implications for future monetary policy.