Big central banks are pivoting towards rate cuts

Major central banks are now signalling that interest rates will likely move lower in coming months as inflation weakens, calling time on what of what has been the most aggressive tightening cycle in decades.

The United States, UK and Sweden all left rates steady this week, with the U.S. Federal Reserve saying it sees lower rates on the horizon.

Traders expect the Fed and ECB to start easing around the mid-year mark, while outlier Japan could finally hike rates soon.

Here’s how big central banks stand, ranked in terms of the rate hikes in the recent tightening cycle.

United States

The Fed held rates steady at 5.25 per cent to 5.5 per cent on Wednesday.

Chair Jerome Powell said interest rates had peaked and would move lower in coming months as inflation continues to fall.

However, he stopped short of a declaring victory in the central bank’s two-year inflation fight, dampening investor hopes for rate cuts as soon as the March 19-20 meeting.

New Zealand

The Reserve Bank of New Zealand held interest rates at a 15-year high of 5.5 per cent in November and is expected to hold again at its Feb. 28 meeting before cutting as early as May.

Inflation came in below the central bank’s 5 per cent forecast in the final quarter of 2023.

Britain

The Bank of England kept rates at a nearly 16-year high on Thursday but softened its stance about when it might cut them, while one of its policymakers cast the first vote for a reduction in borrowing costs since 2020.

Still, with two members of the BoE’s Monetary Policy Committee voting for a rate hike, markets tempered their rate cut bets. Traders now see a roughly 50 per cent chance of a quarter point cut in June, down from 64 per cent before the BoE decision.

Canada

The Bank of Canada held rates at 5 per cent on Jan. 24 for the fourth consecutive meeting.

It said that while underlying inflation was still a concern, the bank’s focus was shifting to when to cut borrowing costs rather than whether to hike again. Markets fully price in a quarter-point cut by June.

Euro Zone

The ECB left rates unchanged at a record high on Jan. 25, but a slightly softer stance on inflation gave markets a hint it was starting to contemplate policy easing.

Money markets reckon the ECB could be the first big central bank to cut rates, with traders pricing in a roughly 90 per cent chance of a quarter point rate cut for April, and around 140 bps in total by year-end.

Norway

The Norges Bank, which delivered a surprise December rate hike, kept its key rate unchanged at 4.50 per cent on Jan. 25 and said borrowing costs would stay on hold “for some time ahead”.

Norwegian core inflation fell to a 15-month low of 5.5 per cent in December. A strengthened Norwegian crown should soften import prices.

Australia

The Reserve Bank of Australia held rates steady in December at 4.35 per cent. Minutes of the meeting showed it had considered hiking again although markets are now pricing cuts from September.

Data in January showed business conditions and inflationary pressures were softening while Australia remains vulnerable to shaky economic conditions in China, its major trading partner.

Sweden

Sweden’s central bank, which left its key rate steady at 4 per cent on Thursday, says it might be able to bring forward the timing of a first rate cut if inflation continues to slow. Economists reckon the Riksbank will start easing in May or June.

Switzerland

A strong Swiss franc, up 5 per cent versus the euro since early 2023, has dampened price pressures in a nation that could be heading for early rate cuts.

Inflation undershot the Swiss National Bank’s (SNB) 2 per cent target for the seventh straight month in December. SNB chairman Thomas Jordan has said there is no need for more hikes from the current 1.75 per cent level.

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