Interest rate reductions from the European Central Bank (ECB) and the Bank of Canada (BoC) this week signal a pivot towards monetary easing among major global economies. This shift follows an aggressive rate-hiking cycle unseen in decades. Here is a breakdown of where key central banks stand and their anticipated actions:
Switzerland In March, the Swiss National Bank (SNB) made an unexpected move by cutting rates by 25 basis points to 1.50%. Despite this, the next steps remain uncertain, with the likelihood of another cut at the June 20 meeting at around 50%. Although inflation remains within the SNB’s target, SNB Chairman Thomas Jordan has cautioned that it may rise if the Swiss franc weakens and import prices increase.
Sweden The Riksbank reduced borrowing costs to 3.75% from 4% in May. It is expected to maintain this rate at its June 26 meeting before considering minor cuts starting in August. Swedish inflation has dropped from over 10% in 2022 to just above the central bank’s 2% target. Meanwhile, the economy has shown resilience after a 2023 slowdown driven by price increases and rate hikes.
Canada The Bank of Canada set a precedent by becoming the first G7 nation to lower rates, trimming its benchmark rate by 25 basis points to 4.75%. This cut, the first in four years, was widely anticipated following a drop in inflation to a three-year low of 2.7% in April. The market anticipates two more 25 basis point reductions this year.
Euro Zone The European Central Bank reduced its record-high deposit rate by 25 basis points to 3.75% this week, marking its first cut in five years. However, the ECB raised its inflation forecasts, emphasizing that further rate reductions would depend on incoming data. Markets currently expect an additional 36 basis points in rate cuts by the end of the year.
Britain The Bank of England is expected to keep rates at a 16-year high of 5.25% during its June 20 meeting. Traders will closely monitor any signals regarding future actions. This meeting is the last scheduled event before the July 4 election, during which BoE policymakers will publicly communicate. Traders, wary of the election’s potential impact on BoE policy and concerned about high services inflation, have revised their predictions, now expecting the first rate cut in September rather than June or August.
United States The Federal Reserve has maintained rates in the 5.25% to 5.5% range since July 2023. With the US economy remaining robust and inflation above target, the Fed is not expected to change rates at its June 12 meeting. A recent decline in core inflation could prompt a rate cut in September, but the Fed is likely to proceed with caution. At the start of the year, traders expected 150 basis points in Fed cuts for 2024; they now foresee about 44 basis points.
New Zealand Money markets project that the Reserve Bank of New Zealand will keep its cash rate steady at 5.5% until November. Despite high rates slowing New Zealand’s economy, the central bank prioritized addressing inflation, which stands at 4%, during its May meeting.
Australia The Reserve Bank of Australia has maintained rates at a 12-year high of 4.35% since November and is not expected to lower them until well into 2025. Australian consumer inflation for April unexpectedly rose to a five-month high of 3.6% year-on-year.
Norway Norway’s central bank signaled in May that rates might remain at 16-year highs of 4.5% longer than previously anticipated. Subsequent data showed economic growth in the first quarter of 2024 and a less-than-expected decrease in core inflation, which stood at 4.4% year-on-year in April. Markets expect Norges Bank to hold rates steady at its June 20 meeting, with no cuts until November.
Japan The Bank of Japan remains an outlier, having raised rates out of negative territory in March for the first time in 17 years. Markets anticipate another 25 basis point hike this year, as policymakers focus on the yen, which reached its weakest level in 34 years in April, leading to government intervention. Governor Kazuo Ueda indicated that the central bank should reduce its significant bond purchases, with investors keenly observing the June 13-14 meeting for potential actions.
Key Takeaways:
- Central banks are gradually transitioning to rate cuts after a prolonged period of increases.
- The timing and extent of future cuts vary significantly across economies, driven by inflation trends and economic conditions.
- Market expectations and central bank signals play a crucial role in shaping monetary policy outlooks.
Conclusion: The recent rate cuts by the ECB and BoC highlight a cautious shift towards monetary easing among major economies. While each central bank’s approach varies, the overall trend points to a measured response to evolving economic conditions and inflation dynamics. As central banks navigate this complex landscape, market participants remain vigilant, balancing expectations with the latest data and policy signals.
