Major central banks pause but rate cuts remain distant

What comes after the break? On October 26, the European Central Bank (ECB) broke a 15-month series of interest rate hikes by keeping borrowing costs at a record level, echoing recent actions by the Federal Reserve and the Bank of England (BoE).

The stage is now set for the world’s major rate-setters to telegraph how long it will take them to declare their battle against inflation over and start cutting rates, following the most aggressive monetary tightening cycle in decades.

So far, nine developed economies have raised rates a total of 3,965 basis points (bp) in this cycle, which began in September 2021. Japan remains waiting.

This is the position of the central banks, from the most aggressive to the most moderate:

1) United States

On October 23, Fed Chair Jerome Powell stated that the strength of the economy and the tightness of the labor market could justify further rate hikes. Traders see no significant chance of a cut until early summer 2024.

2) New Zealand

The Reserve Bank of New Zealand kept its policy rate at 5.5% in May, its highest level in 15 years, but is considered unlikely to cut it in November. In the third quarter, inflation was at the lowest level in two years (5.6%), well above the RBNZ target of between 1% and 3%.

3) United Kingdom

The BoE is expected to keep rates at 5.25% on November 2 as it balances a weak economy with high domestic inflation and the potential for the Middle East conflict to drive up energy prices.

Rate futures show traders believe the Fed will not cut rates, now at their highest level since 2008, until at least June 2024.

4) Canada

The Bank of Canada (BoC) kept its overnight rate at 5% on October 25. Current market prices suggest that investors consider further increases unlikely, but are not betting on cuts.

Inflation, which peaked at more than 8% last year, fell to 3.8% in September, but the BoC also said price growth would not return to its 2% target until the end of 2025.

5) Euro zone

The ECB kept its official rate at 4% on Thursday, noting that the latest data continued to point to a slow reduction in inflation to its 2% target.

“The Governing Council’s previous interest rate increases continue to be strongly transmitted to financing conditions,” the ECB said, adding that it will follow a “data-dependent” approach and that future decisions will be based on incoming data. .

6) Norway

Following September’s rate decision, inflation data in Norway for that month was lower than expected. Prime Minister Jonas Gahr Stoere told parliament last week that rates may have peaked.

7) Sweden

Sweden raised its main rate to 4% in September and faces an unenviable decision about what to do next. Economists polled by Reuters believe the Swedish economy will contract 0.7% in 2023. Swedish inflation, excluding volatile energy costs, stood at an uncomfortable 6.9% in September.

8) Australia

The Reserve Bank of Australia kept rates at 4.1% at its fourth meeting in October. After surprisingly strong inflation in the third quarter, markets estimate the probability of a quarter-point increase next month at 60%. Gov. Michele Bullock has also warned of further tightening if the inflation outlook worsens.

9) Switzerland

On October 19, the Swiss franc hit its highest level against the euro since 2015, after the outbreak of the conflict in Gaza extended a long streak of strength for the Swiss currency.

The powerful currency has helped the Swiss National Bank (SNB) control inflation, which at 1.7% year-on-year in September was comfortably within the target. It also threatens Swiss exports at a time when the economy is stagnant.

Futures markets point to the SNB keeping its official rate at 1.75% in December, before evaluating what to do next.

10) Japan

The Bank of Japan (BoJ) will hold its next meeting on October 31, following many months of a firm dovish stance on rising rates around the world.

The BoJ has intervened heavily in the country’s bond market to keep yields below its 1% cap.

As pressure mounts on the BoJ to adjust its domestic borrowing cost containment policy, bets are growing that it will need to raise that 1% limit.