Core theme for 2024: Global central banks collectively shift to interest rate cuts

From recession to boom, the economic cycle never stops. Correspondingly, after the most aggressive tightening in decades, central banks around the world are collectively shifting to accommodative monetary policy.

At the end of last year, Deutsche Bank pointed out in the report that with the slowdown of the global economy, as of November 20, 2023, the number of global interest rate cuts has exceeded the number of interest rate hikes for the first time since the new crown crisis, marking a major shift in global monetary policy!

The latest overall institutional global rate indicator shows that global interest rates are expected to fall by 128 basis points this year, led mainly by emerging economies, with Brazil, the Czech Republic and some central banks already cutting rates.

There is no doubt that 2024 will be a year of broader rate cuts. The study pointed out that the Fed previously hinted at a rate cut this year, which is expected to lead the central banks of developed countries to pivot, while the European Central Bank and the Bank of England are relatively cautious and are expected to start cutting rates in June this year.

In terms of emerging economies, Argentina and Russia are expected to cut interest rates the most this year, with Argentina cut interest rates by 3,000 basis points, Russia with high interest rates by 400 basis points, and Mexico's central bank, which has avoided premature easing, will also cut interest rates by 175 basis points.

However, there are also contrarians in this year's "wave of interest rate cuts", with the Bank of Japan expected to raise interest rates by at least 10 basis points to exit negative interest rates, and Nigeria, the "largest country in Africa" with persistently high inflation, is expected to raise interest rates by a large 475 basis points. The following are forecasts for interest rate prospects for more than 20 central banks around the world, which together account for about 90% of the world's GDP.

G7 Group: The Fed leads LinkedIn and the EU to follow the Bank of Japan in retrograde

The Fed will lead the pivot of advanced economy central banks, with the Fed funds rate currently in the 5.25%-5.5% range, which is expected to fall to 4.25% at the upper end of the year, which means that the Fed is expected to cut rates by 125 basis points this year. The market is inclined to the Fed to cut interest rates by 25 basis points six times this year, and expects the first rate cut to be in May.

Most Fed officials expect a rate cut this year, but they also stressed that the Fed's actions are contingent on further progress on inflation and will be guided by data. The dot plot released last month showed that policymakers expect a 75 basis point rate cut in 2024.

Fed Chair Jerome Powell and his colleagues stressed that the Fed will "proceed with caution", suggesting that they are not in a hurry to act. Powell said at a press conference in December that it was too early to declare victory, but he also acknowledged that the federal FOMC had already discussed when to start easing policy. Economist Anna Wong pointed out:

The Fed's rate hike cycle is over, and with some key indicators of core inflation expected to approach the Fed's 2% target in March this year, the FOMC is likely to respond to sluggish growth and rising unemployment with its first rate cut, and we expect another 100bp cut for the rest of the year, bringing the Fed's funds rate ceiling back to 4.25% at the end of 2024.

In contrast to the Fed, the European Central Bank, the Bank of England and the Bank of Canada are reluctant to talk about the possibility of rate cuts, but are expected to follow the Fed as inflation slows and economic pressures increase.

First of all, the European Central Bank, inflation in the eurozone fell more than expected, the economy is on the verge of the first recession since the new crown epidemic, the market bets that the European Central Bank will cut interest rates, but the members of the ECB's Governing Council have refuted the idea of a rate cut. The key now is whether the eurozone will experience a mild recession that could still count as a soft landing, or whether the continued chain reaction of the ECB's unprecedented rate hike campaign will trigger a recession severe enough to change monetary policy early:

The ECB has finished raising interest rates, underlying inflation is falling, surveys show a significant deterioration in economic activity, credit expansion is weaker than it was during the European debt crisis, and global sentiment has changed. But barring a recession, the ECB will still need time to be convinced that inflation is on track, and the ECB is expected to cut interest rates for the first time in June 2024, although there is a greater risk of early action.

Secondly, on the BoE, traders have increased their bets on a rate cut as early as May despite BoE Governor Bailey insisting that it is too early to consider a rate cut.

Market speculation is that the Bank of England is likely to cut its inflation expectations at its next meeting (1 February), with UK inflation below 4% in November, much lower than expected. While the UK may have suffered a mild recession in the second half of 2023, the economic growth situation has started to improve. The BoE's new projections are likely to reflect market expectations of lower borrowing costs, slowing inflation, and real wage growth. The Bank of England will also publish its annual assessment of the economy's medium-term growth potential in February. But the latest research points out that:

The outlook for UK CPI inflation has improved significantly in recent months, and we believe spring inflation will fall below the central bank's 2% target, giving ample room for the central bank to start easing. The first rate cut is likely to be in May, with the rate at 4% at the end of 2024.

In addition, on the Bank of Canada, although Bank of Canada Governor Tiff Macklem has repeatedly said that it is too early to discuss a rate cut, economists and markets believe that the Bank of Canada will start cutting interest rates in the second quarter. With interest rates at the highest level in two decades, the key question is how Canada's highly indebted households will continue to live. Shorter-term home mortgages in Canada are rolling faster than in the U.S. compared to U.S. households, which is a big reason why economists believe the country's economy is more sensitive to interest rates.

The six members of the Bank of Canada's Governing Council are also increasingly unanimously agreeing that interest rates are "tight enough" to bring inflation back to its 2% target, suggesting that the central bank's focus is shifting from "reducing inflation" to "putting pressure on the economy":

As the labor market and broader economic activity cool, households and businesses will continue to feel the pressure from rising prices and interest rates. While the BoC Governor has signaled that a policy pivot is imminent, we expect rate cuts to begin in the second half of the year only after data shows that the "last mile" to the 2% inflation target can be achieved.

For the Bank of Japan, however, the question is when, not if, the last negative interest rate policy in the world will end. Bank of Japan Governor Kazuo Ueda eased yield curve control (YCC) policy in his first year in office in response to a sudden rise in yields.

The earthquake in Japan during the New Year's Day caused a handful of economists who expected the Bank of Japan to raise interest rates imminently, postponing their expectations, with the consensus view that the Bank of Japan would raise rates in April. And the preliminary outcome of the spring wage talks in March is expected to be closely watched, as the BOJ has made it clear that this is the key data for its pursuit of a virtuous cycle of wages-inflation:

The Bank of Japan has stepped up its communication efforts to prepare for the eventual introduction of YCC and negative interest rate policy. But the Bank of Japan is in no hurry to act, and the wage and inflation data did not show clear signals, giving the Bank of Japan confidence that the 2% inflation target is sustainable. We expect the BoJ to transition to the new framework in the second half of the year, most likely in July.

BRICS: India turns to turn after inflation stabilizes, Russia is expected to cut interest rates sharply by 4%

In response to the gradual economic slowdown, overseas research expects the RBI to cut interest rates by 100 basis points next year. India's high interest rate of 6.5% has succeeded in reducing core inflation and inflation stickiness, and the focus will now shift to ensuring that higher food prices are not passed on to other areas of the economy, with high interest rates expected to remain high for some time.

Some economists have pointed out that the RBI will cut interest rates in the coming months in response to the gradual slowdown in economic growth, but only if the Fed acts first, which is expected to cut rates in March, followed by the RBI in April and 100 basis points to 5.5% by the fourth quarter. Even so, the RBI is likely to keep liquidity tight and may start selling government bonds from March to maintain its policy of "aggressively curbing inflation".

On the Russian side, over the past year, the Central Bank of Russia has more than doubled the key interest rate to 16%. The head of Russia's central bank said in December that the tightening cycle could be coming to an end.

The study argues that the key interest rate of the Central Bank of Russia has peaked, and the next job for policymakers is to avoid premature easing. Most central banks will face the same task in 2024, with the Bank of Russia expected to cut interest rates by 400 basis points by the end of the year, and inflation expected to fall to 4.7% year-on-year by the end of the year if the central bank keeps its policy rate above 12% throughout 2024.

As for the central bank, the central bank has cut interest rates by 200 basis points since August last year, and most analysts believe this easing cycle will continue until mid-2024, after the central bank previously said it would continue to cut rates by half a percentage point until March. The study expects the central bank to maintain its current pace at its May meeting, after which the central bank is likely to be more cautious and cut rates to 25 basis points, bringing real rates closer to 9% by the end of the year.

As for the South African Central Bank, the South African Central Bank unanimously decided to keep the repo rate unchanged at its meeting in November last year, confirming that the rate hike cycle is over. Although price growth has slowed at the end of 2023, inflation risks remain a concern for the South African central bank. The research department expects the South African Reserve Bank to keep its key interest rate unchanged at its two meetings in the first quarter, and the central bank is likely to start cutting rates in the fourth quarter when inflation approaches the 4.5% level.

MINT Central Bank: Mexico is expected to cut interest rates by 175 basis points Turkey will turn around after raising interest rates

Among Latin America's major inflation-targeting central banks, Mexico's central bank is the only one that has not acted, keeping interest rates at 11.25% since the end of its tightening cycle in May last year. The governor of the Bank of Mexico said that it may cut interest rates in the first quarter, although inflation is not expected to fall back to its target level of 3% until the second quarter of 2025, which means that any easing will be implemented gradually, and the Bank of Mexico is expected to cut rates by 175 basis points by the end of the year.

Erdogan, who pursues "interest rate cuts to fight inflation", returned to his usual monetary policy last year and is expected to cut interest rates again this year. Overseas research expects the central bank to raise interest rates for the last time in January, raising the benchmark interest rate to 45% (currently 42.5%), which the central bank will maintain until the third quarter, while further tightening monetary policy through alternative tools such as banking supervision. Still, Turkey's local elections in March could prompt the central bank to start an easing cycle sooner than expected, with President Recep Tayyip Erdogan leaning towards electoral support by providing cheap money.

In Indonesia, the central bank is expected to cut interest rates by 125 basis points by the end of the year, and the central bank will be more cautious in pivoting to accommodative policy, as Indonesia faces inflation risks such as supply chain disruptions, dry weather, and ongoing market volatility could also weaken the rupiah and push up the cost of imported goods such as oil and rice. In Nigeria, inflation is expected to continue to accelerate until at least the first quarter due to the weakening of the naira and the removal of fuel subsidies to cause inflation, and the study expects the Nigerian central bank to shift to inflation targeting, raising interest rates by 475 basis points in 2024.

Other G20 countries and Eastern European economies: Argentina is expected to plummet by 3,000 basis points South Korea, Australia and Rui have started to cut interest rates

Argentine President Milley took office three times and carried out a comprehensive reform of monetary policy, devaluing the peso and changing his benchmark interest rate instrument from a 28-day bond to a 1-day repo note, which means reducing the interest rate from 133% to 100%. Milley warned of the possibility of hyperinflation in the coming months, posing a huge challenge to monetary policy.

Looking ahead to this year, the study expects Argentina to continue cutting interest rates by 3,000 basis points. Some economists have pointed out that at the beginning of Milley's administration, lower real interest rates may have helped reduce the real value of public debt, but this strategy is risky, it may stimulate demand for public bonds, but it may also fuel inflation and the rush to buy the dollar.

The Bank of Korea is pushing back against speculation that the Bank of Korea may follow the Fed's signal to adjust monetary policy sooner than expected. Bank of Korea Governor Lee Chang-yong said the central bank now has more room to chart its own course based on domestic conditions, and the "last mile" to fight inflation may be difficult. The Bank of Korea is expected to cut interest rates starting in the third quarter and by 50 basis points by the end of the year.

The RBA's tightening is nearing its end, with borrowing costs now rising to a 12-year high. The RBA president sticks to a hawkish tone and is not expected to pivot to accommodative policy as easily as central bankers in other advanced economies. But at the same time, only a handful of economists believe that the RBA could raise interest rates again early this year if inflation proves to be stubborn again. The RBA is expected to cut interest rates by 75 basis points by the end of the year.

In terms of other central banks, Switzerland has one of the slowest growth rates in advanced economies and is also more resilient than expected, and the SNB can cut interest rates by 25 basis points in 2024. The RBNZ is likely to start cutting interest rates earlier after an unexpected contraction in the third quarter, with revised economic data showing weak economic growth and less inflationary pressures in New Zealand in 2023.