Market expectations have increased for global central banks to ease their aggressive monetary tightening campaigns and begin cutting interest rates this year. With inflation pressures expected to continue receding, the Federal Reserve, European Central Bank (ECB), and Bank of England (BOE) are expected to lead the push to lower interest rates this year. However, Japan may remain the standout among its peers, with the Bank of Japan (BOJ) expected to exit negative interest rates and tighten monetary policy.
The Fed signaled in its December dot plot of interest rate expectations that it expects to lower interest rate by -75 bp this year from the current fed funds target range of 5.25%-5.50%. However, market expectations are well ahead of Fed projections as the swaps market anticipates the Fed will cut rates by 150 bp this year, with the first 25 bp rate cut coming at the April 30-May 1 FOMC meeting. Fed Chair Powell, at last month’s FOMC meeting, said that the Fed could “proceed carefully” on easing policy, suggesting the Fed is in no hurry to cut interest rates and that it was premature to declare victory against inflation.
The ECB is also expected to begin cutting interest rates this year, with the swaps market pricing in a 100% chance of a -25 bp rate cut by the ECB at its April 11 policy meeting. Market expectations are for the ECB to cut its deposit rate by -75 bp this year from the current 4.00% to 3.25%. Despite inflation falling more than expected, ECB officials have refused to endorse market expectations of interest rate cuts as they fret about rising wage costs in the Eurozone. However, a further slowing of economic activity and price pressures in the Eurozone could prompt the ECB to lower borrowing costs earlier than planned.
The BOE is expected to ease monetary policy this year. The markets are pricing in five -25 bp rate cuts from the BOE this year to lower the base rate from the current 5.25% to 4.00% starting at the June 20 policy meeting. The BOE, however, may act to cut interest rates as soon as its May 9 meeting if price pressures continue to slow, despite recent comments from BOE Governor Bailey that it’s too soon to consider a policy pivot. The BOE will likely lower its inflation forecasts at its next meeting on Feb 1 after November’s inflation news came in much lower than expected at under 4%.
Japan is the last of the major global economies to keep negative interest rates, with the BOJ’s current policy-balance rate at -0.1%. The question for the BOJ is not if it will end its negative interest rate policy but when. BOJ Governor Ueda has said the BOJ needs to see incoming data to assess the stability of inflation trends before it changes monetary policy. However, the New Year’s Day earthquake in Japan may slow economic activity and prompt the BOJ to delay a tightening of monetary policy. The markets are looking for clear signals from wages and inflation data that would convince the BOJ that its 2% inflation target is secure before it begins tightening policy.
There are concerns among some analysts and economists that the current pace of slowing global price pressures will not be fast or deep enough to allow central banks to begin cutting interest rates. Consumer prices remain well above the 2% targets of the Fed, ECB, and BOE, which may prompt them to keep monetary policy tighter for longer. Also, labor markets worldwide remain tight and may keep upward pressure on wages, thus raising labor costs and forcing central banks to delay any policy easing. However, if inflation continues to slow, the pressure will mount on central banks to begin cutting interest rates this year.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
