Fed pivot dominates as global rate hike cycle falters in December

The long-awaited turn in the monetary policy of the Federal Reserve from the United States arrived in December, the main central banks developed countries applied only one increase in interest rates and the number of cuts accelerated even more in emerging markets.

In December, eight of the central banks that oversee the 10 most traded currencies held meetings to set rates, with only Norway raising rates by 25 basis points.

In the last month of the year, the ECB and the monetary authorities of England, Japan, Australia, Canada and Switzerland chose to keep reference rates unchanged in their meetings, as did the United States Fed. But the striking dovish turn from the world’s top central bank caught markets by surprise and raised bets that interest rates would fall faster and sooner than expected.

European and other policymakers did not echo those expectations, and markets appear to disagree with them on the timing.

“The slowdown in the global economy, the easing of inflationary pressures and the cooling of labor markets would open the door to rate cuts by major central banks next year”said Dean Turner, chief economist for the Euro zone and UK from USB Global Wealth Management: He added that keeping rates at current levels would tighten conditions in real terms.

“Few, if any, central bankers believe this will be necessary, so it is more than likely that rates will be lowered in 2024.”

So far this year, the central banks The G-10 have raised interest rates by 1,200 basis points in 38 increases, less than half of the 2,700 basis points they rose in 2022, when 54 increases were recorded, according to Reuters calculations.

Meanwhile, in emerging economies, which have been at the forefront of both the tightening and easing cycles, rate cuts gained momentum.

Five of the 18 developing economy central banks in the Reuters sample cut rates, the most in at least three years. Monetary officials in the Czech Republic began their easing cycle, while Brazil, Hungary, Colombia and Chile redoubled their easing efforts. In the Reuters sample of markets, 13 central banks held rate-setting meetings in December.

The latest measures bring the annual total of rate cuts to 945 basis points over 18 meetings, compared to 1,765 basis points of cuts in 2022 over 11 meetings. According to analysts, there is still much to do.

“The moderate turn of the Fed “It has boosted risk sentiment in emerging markets and offers central banks in these markets more room for relaxation.”said Christian Keller, head of economic research at Barclays.

However, both Russia and Turkey, facing continued pressure on their currencies and stubbornly high inflation, remained in rising mode, with a 350 basis point tightening between the two.

In total, since the beginning of the year, emerging market central banks have increased their rates by 5,075 basis points, compared to increases of 7,425 basis points in all of 2022.