In the three days from September 20 to September 22, the central banks of more than a dozen major economies, including the Federal Reserve, the Bank of England, the Bank of Japan, the Central Bank of Brazil, and the South African Reserve Bank, successively announced the latest monetary policy decisions, involving nearly half of the G20 countries and five of the world's top ten trading currencies.
With the Federal Reserve and the Bank of England announcing the suspension of interest rate hikes, the Bank of Japan, which has refused to change its loose monetary policy in this round of global inflation, continuing to stand still, and the European Central Bank, which announced a 25 basis point rate hike last week, clearly signaled that the next monetary policy meeting would pause interest rate hikes, the central banks of major advanced economies have de facto agreed monetary policy, that is, tightening policy is close to peaking.
For advanced Western economies such as Europe and the United States, it has become a consensus to maintain current restrictive interest rates long enough to keep inflation within the 2% target range. This also means that the monetary policy easing of the 2010s will not return in the short term after a decade of easing.
Fed pauses interest rate hikes again, Powell says "the goal has been reached"
In its September 20 monetary policy decision, the Fed announced a pause in interest rate hikes and kept the federal funds rate range at 5.25%-5.5%, in line with previous expectations.
The Fed has raised interest rates 11 times since the start of the rate hike cycle in March last year, with a cumulative increase of 525 basis points, and the current federal funds rate range is already the highest in 22 years. Data from the Bureau of Labor Statistics shows that inflation in the United States has fallen from a peak of 9.1% to 3.7% in August during this period. At the previous Jackson Hole Global Central Bank Annual Meeting, Federal Reserve Chairman Jerome Powell emphasized that tightening monetary policy has played a positive role in controlling inflation.
However, the US inflation rate of 3.7% in August has rebounded for the second consecutive month, and it has risen sharply from the 3.0% inflation rate in June. This also means that inflation in the United States remains stubborn, with core inflation in the United States still as high as 4.3% in August and core inflation in the services sector as high as 4.1%, both well above the Fed's medium-term inflation target of 2%.
Therefore, Powell again said at the press conference: "Ready to raise interest rates further if appropriate, and maintain monetary policy at a restrictive level until it is certain that inflation can continue to decline." On the other hand, Powell also pointed out that "we are quite close to what needs to be achieved."
Powell's statement undoubtedly implies that the Fed is close to the peak of interest rates in this wave of rate hikes. The dot plot forecast for the Fed's decision also shows that the Fed will raise interest rates by 25 basis points for the last time this year. As for 2024, the Fed will cut interest rates twice and keep the federal funds rate at 5.1%, while the median expected federal funds rate for 2025 and 2026 is 3.9% and 2.9%, respectively.
Compared with the Fed's dot plot forecast released in June, the number of rate cuts in 2024 has been reduced from four to two, and the median forecast for the federal funds rate in 2025 has increased by 0.5%.
Higher projected interest rates over the next three years also mean that the Fed's restrictive interest rate policy will remain elevated for longer, known as higher for longer.
It should be pointed out that Powell's optimistic expectations for US economic growth at the Jackson Hole annual meeting are not only the confidence that the Fed can maintain high interest rates for a longer time, but also reflected in the formal interest rate decision. The Monetary Policy Committee has raised the US GDP growth forecast for this year to 2.1% from 1% in June and 1.5% in 2024 from 1.1%.
In the shadow of recession, European countries may have peaked in interest rates
The day after the Fed announced the pause in interest rate hikes, the Bank of England similarly announced that it would leave its current benchmark interest rate unchanged at 5.25%.
Unlike the Fed's strong economic growth and rudimentarily controlled inflation data, the Bank of England's pause in raising interest rates came as a surprise because inflation in the UK remained at 6.7% in August, which was already lower than last year's peak of 11.1%, but it was significantly higher than that of other large European countries and the United States. The OECD forecasts inflation in the UK for the whole year to reach 7.2%, the highest among major industrial countries.
However, Bank of England Governor Bailey still said on September 22: "Further increases in interest rates are unlikely in the future, and many indicators suggest that inflation continues to fall despite new upward pressure from high oil prices." "The Bank of England has raised interest rates 14 times before.
Halting rate hikes when inflation is not effectively controlled has also caused divisions within the Bank of England, where only 5 members of the bank's nine-member committee support maintaining interest rates.
On the other hand, the weak UK economy has also forced it difficult for the Bank of England to raise interest rates further. The latest data from the Office for National Statistics showed that the country's GDP contracted by 0.5% in July from June. Goldman Sachs and JPMorgan have since cut their full-year GDP growth rates to 0.3% and 0.4% respectively, respectively, and the UK is also the worst economic performer in the G7.
The European countries that have also chosen to suspend interest rate hikes with the Bank of England are Switzerland.
On September 21, the Swiss National Bank announced that it would maintain the policy rate at 1.75%, ending a five-year streak of rate hikes, but the bank did not rule out the possibility of further rate hikes in the future.
Unlike the UK, which has poor economic indicators, inflation in Switzerland was only 1.6% in August, even below the upper limit of the inflation target of 2%. Considering that the Swiss government predicted on September 20 that the country's GDP growth rate will still reach the level of 1.3% this year, the SNB actually lacks the motivation and necessity to raise interest rates further.
In addition, on the 21st, the central banks of Norway and Sweden both announced a 25 basis point interest rate hike and raised the key interest rate to 4.25% and 4%.
Norges Bank Governor Ida Wolden Bache said there could be another rate hike in the future and interest rate policy may need to remain tight for some time to come. This is Norway's 13th rate hike in two years, and Norway's latest inflation rate in August is still high at 4.8%. The 25 basis point rate hike by neighboring Sweden was also in line with market expectations, and Swedish inflation reached 7.2% in August, significantly higher than the eurozone inflation rate. In its statement, the Riksbank also stressed that the country's economy is moving in the right direction, but inflationary pressures remain too high. The main factor contributing to the high inflationary pressures in Sweden is the sharp decline of the Swedish krona compared to both the euro and the US dollar, which has caused imported inflation. The Riksbank expects another rate hike in December.
Sweden and Norway did not follow the Fed's lead and still chose to raise interest rates modestly, largely influenced by the ECB's interest rate decision last week.
On September 14, the ECB announced that it would raise the three key interest rates of the deposit facility rate, the main refinancing rate and the marginal lending rate by another 25 basis points to 4%, 4.5% and 4.75%, respectively.
Compared with the United States, the ECB started its interest rate hike cycle late, and the frequency and magnitude of interest rate hikes of 10 cumulative times and 450 basis points were not as aggressive as those of the Fed. This also led to both Eurozone inflation and core inflation of 5.3% in August, slightly higher than the US inflation figures for the same period.
ECB President Christine Lagarde has previously said that "the fight against inflation has not yet been won", and coupled with the fact that Europe may still face the impact of rising energy prices this winter, it is not surprising that the ECB raised interest rates slightly.
It should be noted that Lagarde also stressed after the rate hike: "Based on the assessment, we believe that the ECB's current key interest rate has reached a level that can be maintained for a sufficient period of time and will make a significant contribution to the timely return of inflation to our target." "This undoubtedly implies that another sharp rate hike by the ECB is highly unlikely."
At the same time, Lagarde also said that "whenever necessary, the ECB can set interest rates at a sufficiently restrictive level to achieve inflation back to the medium-term target of 2%". This stance is fully consistent with the Fed's strategy to maintain restrictive rates for a longer period of time.
The ECB's alignment with the Fed also means that interest rates in Western economies are about to peak or have already peaked, and that it has become a consensus to maintain tight monetary policy through restrictive interest rates for some time to come.
Jennifer McKeown, chief global economist at Capital Economics, believes this week's series of central bank decisions marks a turning point in global monetary policy. Capital Economics expects 21 of the world's 30 major central banks to start cutting interest rates in 2024. JPMorgan believes that the ECB has completed the last rate hike of the cycle, which will be followed by a prolonged period of high interest rates. Principal Asset Management believes that the strong growth of the US economy makes there little room for (monetary) policy easing next year.
In addition to the need to maintain higher interest rates for an extended period of time due to stubborn inflation, the exceptionally buoyant labor markets in Western countries and the soft landing of the global economy provide the basis for the implementation of long-term restrictive interest rates.
In its summer economic forecasts released on September 11, the European Commission lowered the EU's economic growth rate from 1.1% to 0.8% this year and from 1.7% to 1.4% in 2024. While these growth rates are not significant, there is no doubt that both the eurozone and the EU have fared better than previously expected recessions.
Compared with a strong labor market and economic performance, medium- and long-term restrictive interest rates will undoubtedly have a greater impact on financial markets.
Jack Ablin, chief investment officer at Cresset Capital, said: "We will face continued headwinds and funding costs will be hurt." Compared with the recent decline in U.S. stocks, the yield on the benchmark 10-year U.S. Treasury note has soared more than 13 basis points to 4.492%, the highest level since 2007, while the German 10-year bond has hit a six-month high of 2.73%.
Compared with the reactive bond market, the major stock indexes in Europe and the United States suffered "Black Thursday" on September 21. Although the Fed's suspension of interest rate hikes and the previous European Central Bank's small 25 basis point rate hike were completely within market expectations, and the Bank of England's unexpected suspension of interest rate hikes was theoretically more beneficial to the stock market, the three central banks' long-term unanimous statement of maintaining restrictive interest rates still weighed on market confidence.
Monetary policies in emerging economies vary widely
Compared with the major economies in Europe and the United States that are about to end the interest rate hike cycle, some emerging economies represented by Brazil have taken the lead in cutting interest rates.
On September 20, the Central Bank of Brazil announced a second 50 basis point rate cut to 12.75%. Brazil has already raised its benchmark interest rate to a peak of 13.75% through 13 rate hikes. With Brazil's central bank expecting inflation to fall to 4.84% throughout the year, the central bank previously expressed "confidence in initiating a gradual monetary easing cycle" in its July decision. Brazil's central bank committee expects a third 50 basis point rate cut at its November monetary policy meeting and a benchmark rate to 11.75% by the end of the year.
In emerging Asia, the Philippine and Indonesian central banks both announced on September 21 that they would leave their current interest rates unchanged. As both countries face inflationary pressures from currency depreciation and rising rice prices, it is difficult for the two central banks to follow Brazil's lead in starting a rate cut cycle.
The current overnight borrowing rate in the Philippines is 6.25%, while Indonesia's 7-day reverse repo rate is 5.75%. Bank Indonesia Governor Perry Warjiyo said the current interest rate policy would ensure that inflation remained low. Bank Indonesia expects inflation to be 3%, ±1% and 2.5% ±1% this year and next, respectively, and the bank's monetary policy remains focused on controlling the stability of the rupiah.
Societe Generale does not expect Bank Indonesia to consider cutting interest rates before the first quarter of 2024, or even ruling out another rate hike in November this year to widen spreads and reduce depreciation pressure on the rupiah.
Other emerging economies that have also announced the maintenance of key interest rates include South Africa. On September 21, the South African Reserve Bank announced that it would maintain the main lending rate at 8.25%, which is also the second time the bank has suspended interest rate hikes. South Africa's inflation rate of 4.8% in August, although slightly rebounded from the previous value of 4.7% in July, is generally within the South African Central Bank's inflation target range of 3%-6%. Lesetja Kganyago, president of the bank, said on the same day: "The work of fighting inflation is not yet complete, and risks remain. We stand ready to act. ”
While European and American countries and most emerging economies are or are about to cross the peak of interest rates, a small number of countries, represented by Turkey and Russia, are still in a difficult cycle of interest rate hikes.
On September 21, the Central Bank of Turkey announced another one-time 500 basis point rate hike, raising the benchmark rate from 25% to 30%. In contrast to the neighboring eurozone, Turkey, which also faced huge inflationary pressures during the energy crisis, has long refused to start a cycle of interest rate hikes under the political influence of "Erdogannomics", and instead reversed interest rates from 19% to 8.5%. Erdogan once called interest rates the "mother of all evil" and at one point said that "we have been deceived by Western economics for a long time."
It was not until after Erdogan's election victory in May and the change of central bank governor that Turkey began its first interest rate hike in June this year, which is almost a year behind the start of the eurozone rate hike cycle, and the Turkish central bank has now raised interest rates four times, and also trailed the European Central Bank's nine rate hikes.
The inaction of Turkey's central bank has directly contributed to the country's inflation remaining ultra-high for nearly two years, reaching a record 85.5% in October last year. Inflation remained high at 58.9% in August, a further surge from 48% in the previous month of July, and core inflation reached 64.9% in August. While the bank has highlighted its medium-term inflation target of 5%, the current status quo is clearly far from the target, with the central bank expecting Turkish inflation to reach 65% for the whole of this year in July. At the same time, the Turkish lira has also become the worst performer among the world's major currencies, with the lira depreciating against the dollar by more than 60% in the past three years.
Capital Economics believes that Turkey still needs to implement more austerity measures, and expects the central bank to raise interest rates by a further 500 basis points to 35% by the end of the year, and the country's GDP growth rate will slow to 2.9% this year.
Economies facing dual inflationary and currency depreciation with Turkey include Russia.
Russia's central bank announced a 100 basis point rate hike to 13% last week on September 15, the third rate hike in nearly two months. The bank has raised Russia's inflation forecast for this year to 6%-7% from 5.0%-6.5% previously, significantly above its 4% inflation target. The bank also noted that the ruble has also depreciated by about 30% against the dollar so far this year, and will evaluate the feasibility of further raising the key interest rate at its next meeting.
The Bank of Japan responds to changes with no change
Unlike Europe and the United States, which have suffered severe inflationary shocks, Japan, where inflation has always hovered in the 3% range, is a retrograde in monetary policy among advanced economies. Since the beginning of the interest rate hike cycle in Europe and the United States, the Bank of Japan, which has experienced a change of president, has maintained its negative interest rate policy and yield control curve control.
On September 22, the BOJ's latest monetary policy decision unsurprisingly "replayed the same old tune" and said that it would keep the short-term key interest rate unchanged at -0.1%, and the 10-year Japanese bond yield control range remained at ±0.5%, almost exactly in line with the BOJ's July interest rate decision.
In its resolution, the BOJ also said that it will continue to implement monetary easing policies to flexibly respond to changes in economic activity, prices, and financial conditions amid high uncertainties in the domestic and foreign economies and financial markets. Specifically, the bank decided to maintain a large-scale monetary easing policy that induces long-term interest rates to around 0%, with a ceiling on long-term interest rates at 1%, and if market interest rates exceed this ceiling, the bank will buy government bonds indefinitely to curb interest rates.
Bank of Japan President Kazuo Ueda said at a press conference on the same day: "From the perspective of the price situation, there are signs of positive changes in wages and price settings, but the realization of price targets is not yet mature. We will continue to tenaciously implement monetary easing. ”
Inflation data released by Japan's Ministry of Internal Affairs and Communications showed that the headline consumer price index rose 3.2% year-on-year in August, while the core consumer price index, which excludes fresh food, rose 3.1% year-on-year in the month. While Japan's inflation figures have been above the BOJ's medium-term inflation target of 2% for 17 consecutive months, the country's 4.3% inflation peak at the start of the year is not serious compared to major economies in Europe and the United States.
This is enough to explain Kazuo Ueta's continued accommodative attitude. In an interview with the Yomiuri Shimbun, Kazuo Ueda previously stressed that monetary policy will only be further determined if there is enough information at the end of the year, especially if the trend of rising wages is established next spring.
Kazuo Ueta's vague statement also means that previous speculations that the BOJ is about to end negative interest rates and turn to a hawkish stance do not hold up in the short to medium term. Kazuo Ueta's September 9 statement that he would cancel the negative interest rate policy, which was the mainstay of large-scale monetary easing, once he was convinced that prices would continue to rise along with rising wages, did not specify a date.
Given that the Cabinet Office's medium- and long-term economic outlook released in July, forecasting inflation at 2.6%, 1.9%, and 1.2% for the next three years, as well as an overall average inflation rate of only 0.7% from 2027 to 2032, the end of the BOJ's negative interest rate policy may remain far away.