central bank Global Central Banks Navigate Monetary Policy Crossroads: A Detailed Analysis of Anticipated Shifts
Wall Street Bets on Which Central Bank Will Shift First: As global economic landscapes evolve, analysts are closely monitoring the potential shifts in monetary policies among major central banks in the coming months. Among those in the spotlight are the Bank of Japan and the Swiss National Bank, each poised to take divergent paths in response to unique economic conditions.
The United States Federal Reserve is at the forefront of expectations, with a forecasted inaugural cut in June. Analysts are pegging a 25 basis point reduction, which would bring the Fed funds target rate to a range of 5% to 5.25%, according to data from CME Group’s FedWatch tool. However, the Federal Reserve, as revealed in the minutes from its January meeting, approaches interest rate cuts with caution. Officials expressed optimism about the general downward trend in inflation but were wary of implementing rate cuts too swiftly.
Similarly, the European Central Bank is expected to initiate its own rate cuts in June. This anticipation is fueled by the euro zone’s inflation easing to 2.8% in January, coupled with a lackluster economic growth performance across the bloc. In contrast, the Bank of England is projected to lag behind in the timeline for monetary policy relaxation. A recent Reuters poll reveals that a slim majority of economists anticipate the first cut from the Bank of England in August.
Goldman Sachs has recalibrated its projections for rate cuts, shifting the timeline from May to June. The investment giant suggests that the Monetary Policy Committee will deliver a total of five 25 basis point cuts in 2024, deviating from the market consensus of three. If this materializes, the main Bank rate could reach 4% by December.
Market expectations have positioned the Swiss National Bank as a potential frontrunner among G10 central banks to cut rates. There is approximately a 60% chance, according to LSEG data, that the Swiss National Bank might implement a 25 basis point cut in March. This move follows a decline in Swiss headline inflation from 1.7% in December to 1.3% in January, well below consensus forecasts. Core inflation also witnessed a drop from 1.5% to 1.2%.
Capital Economics analysts highlight the significant decline in inflation, asserting that it “looks sure to undershoot the SNB’s Q1 forecast of 1.8%.” They predict that policymakers at the Swiss National Bank might respond to these economic indicators by cutting the policy rate from 1.75% to 1.50% at their next meeting in March.
However, uncertainties persist ahead of the March 21 meeting. UBS economists hold a different view, suggesting that the SNB will likely commence rate cuts in June, followed by two additional cuts in September and December, culminating in an eventual terminal rate of 1%. UBS reasons that the SNB might want to wait until domestic price pressures, particularly from higher rents, no longer pose upside risks to inflation. Despite the current economic forecast assuming inflation picking up to 2% in Q2, UBS considers the January inflation downside surprise as a potential trigger for the SNB to cut rates in March.
While numerous central banks are contemplating loosening monetary policies after more than two years of aggressive tightening to combat inflation, the Bank of Japan finds itself at an interesting crossroads. In a research note, Société Générale contends that the Bank of Japan has all the necessary elements to do away with its negative interest rate and yield curve control policies.
Since January 2016, the BOJ has maintained a short-term deposit rate of 0.1% in an effort to stimulate the economy amid prolonged stagnation. A rate hike, if executed, would mark Japan’s first in 16 years. The core inflation rate in the country, excluding food and energy, reached 2% year-on-year in January after a third consecutive monthly increase.
Société Générale’s Kit Juckes argues that if inflation stabilizes around 2%, there is no reason for the BOJ to delay abandoning its negative interest rate and yield curve control policies. The majority of analysts share this sentiment, expecting the BOJ to end its eight-year period of negative interest rates in April, along with its yield curve control policy.
In a bid to navigate the delicate balance between maintaining economic stability and addressing inflation, the BOJ introduced flexibility to its yield curve control policy last July. This long-term measure involves targeting a specific interest rate and adjusting bond purchases to keep government bond yields within the chosen target range.
Frédérique Carrier, Head of Investment Strategy at RBC Wealth Management, notes the BOJ's cautious approach. She points out that the central bank has been hesitant to abandon its negative interest rate policy due to concerns about negatively impacting Japan’s already subdued economy. Carrier suggests that the BOJ is carefully navigating the potential risks of hiking rates too quickly, given the fresh memories of tenacious deflation and the fragile consumption environment resulting from Japan’s mature population.
Despite the BOJ’s caution, the weak yen has proven advantageous for exporters but poses challenges for importers. The weak yen is contributing to inflation in Japan. Carrier argues that the market’s pricing for a 10 basis point hike by June and 25 basis points by year-end is cautious enough not to disrupt the Japanese economy, especially in the context of other central banks cutting rates globally.
As global central banks face complex economic realities, these nuanced analyses of upcoming policy shifts shed light on the delicate balancing act each institution must perform to sustain economic growth and stability. (Wall Street Bets on Which Central Bank Will Shift First)