CFIC Introduction
Although there are still inflation rates in many countries that have not yet reached the expected target, as long as the subsequent downward trend of inflation does not deviate significantly from the trajectory, it is still difficult to change the background of this year's interest rate cut year. However, as the Fed's "hawkishness" has led to the continuous postponement of interest rate cut expectations, more and more central banks may delay the pace of interest rate cuts.
Original title: [Xinhua Interpretation] Global Central Bank Monetary Policy Observation in the First Quarter: "The Wave of Interest Rate Cuts" Is Coming Japan and Turkey Raise Interest Rates Against the Trend In 2024, as inflation is under control in most economies, interest rate decisions have attracted much attention, and the market expects this year to be a real turning point in monetary policy. In the first quarter, in a political and economic environment full of uncertainties, the monetary policies of the world's major central banks have been up and down, in which interest rate hikes and interest rate cuts are intertwined, and consensus and divergence coexist. During this period, there were not only the Swiss National Bank, which unexpectedly fired the first shot of the G10 interest rate cut, and the Central Bank of Brazil, which cut interest rates firmly as expected, but also the Bank of Japan that announced the end of the era of negative interest rates and the Bank of Turkey, which raised interest rates "violently", and more central banks in the United States, the United Kingdom, the eurozone and Canada that chose to wait and see what happened. Looking ahead, although there are still inflation rates in many countries that have not yet reached the expected target, as long as the subsequent downward trend of inflation does not deviate significantly from the trajectory, it is still difficult to change the background of this year's interest rate cut year. However, as the Fed's "hawkishness" has led to the continuous postponement of interest rate cut expectations, more and more central banks may delay the pace of interest rate cuts. Interest rates "rise and fall" In the first quarter, the monetary policies of Japan and Switzerland turned sharply, the inflation situation in major developed economies generally improved, and global central banks have also entered the key nodes of monetary policy. Among them, the Bank of Israel and the Swiss National Bank have successively completed the world's first decline in the year and the first decline in the central bank of the G10 countries, while the Bank of Japan has "bucked the trend" to start raising interest rates for the first time in 17 years, and the eight-year era of negative interest rates has since ended.
On January 1, 2024, the Bank of Israel announced the first interest rate cut in nearly four years, becoming not only the first central bank to cut interest rates this year, but also the first developed country to ease monetary policy after the global wave of interest rate hikes. It is understood that the Bank of Israel's reasons for cutting interest rates include: financial markets have stabilized since the outbreak of the Palestinian-Israeli conflict, inflation has fallen, and economic growth has been weak. Nira Shamir, chief economist at Israel Discount Bank, pointed out that the Bank of Israel, which had previously focused on financial stability, is now taking more aggressive easing measures to try to help households. However, Bank of Israel Deputy Governor Andrew Abir also reminded that although the decline in inflation and the recovery of financial markets have allowed interest rate cuts to begin, further easing will take time due to the impact of war and budgeting. On 21 March, the SNB unexpectedly announced a rate cut given that it had made significant progress in fighting inflation. The impact of the decision on the global foreign exchange market overnight was immediate, directly pushing the dollar index to its biggest gain in a month on the same day, sweeping away the previous day's decline caused by the Federal Reserve's interest rate meeting. According to the data, compared with inflation in the United States and the United Kingdom, which has been "delayed in reaching the target", the Swiss inflation rate has fallen to 1.2% as of February, which has remained within the SNB's target range of 0-2% for the ninth consecutive month. This action by the SNB has also increased the pressure on other G10 central banks, suggesting that they will cut interest rates a little sooner than expected. "said Helen Given, a forex trader at the foreign exchange broker Monex America. The Bank of Japan also ushered in a major inflection point, but on the eve of the global tide of interest rate cuts, the Bank of Japan started a "contrarian" interest rate hike, ending the eight-year era of negative interest rates. On 19 March, the Bank of Japan (BOJ) announced an increase in its benchmark interest rate from -0.1% to 0-0.1%, while nominally exiting its yield curve control policy and halting purchases of risky assets such as exchange-traded funds. According to the analysis, behind the policy turn, with the recovery of the endogenous growth momentum of the Japanese economy, Japan's domestic inflation is gradually changing from external input to a virtuous cycle of wage-demand pull, and the core goal of the Bank of Japan's continuous monetary easing has been nearly achieved. At the same time, the problem of monetization of Japan's fiscal deficit caused by long-term monetary easing has become prominent, and the objective challenge of artificially distorted government bond prices has become more and more prominent, and the yen exchange rate is facing severe depreciation pressure. However, it should be noted that the Bank of Japan may be relatively slow to raise borrowing costs further as the economic recovery remains fragile, and Japanese interest rates are expected to remain near zero in the long term. Moreover, the end of the negative interest rate policy did not change the decline of the yen, which gradually fell to a 34-year low against the dollar. At present, many investors are closely watching when the Japanese government will actually intervene. The central banks of the United States and Europe are waiting to see what happens, and the "hawks and doves" are constantly switching between the "free and easy" Swiss National Bank and the "retrograde" Bank of Japan, subject to factors such as inflation, employment and even economic growth, most of the G10 central banks still choose to wait and see. The Federal Reserve, for example, remains highly cautious about timing interest rate cuts, despite strong economic data, but its path to fighting inflation has been full of twists and turns. On 20 March, the Fed left interest rates unchanged at 5.25%-5.5% for the fifth time in a row, but while raising inflation and economic growth forecasts, the Fed continued to "hint" at three rate cuts this year. Although the forecast for three rate cuts is dovish to a certain extent, everything is still uncertain under the data-dependent model, and the policy path will continue to be disrupted by economic data such as inflation. Fed Chairman Jerome Powell has also become more and more adept at "playing Tai Chi", saying that "the Fed's policy rate may have peaked and it is appropriate to start easing monetary policy within the year", while stressing that "interest rates will remain high for longer if necessary". In terms of the European Central Bank, on March 7, the European Central Bank kept the three key interest rates unchanged for the fourth time in a row, keeping the main refinancing rate, the marginal lending rate and the deposit facility rate at 4.50%, 4.75% and 4.00% respectively, in line with market expectations. At the same time, ECB President Christine Lagarde hinted that a rate cut is more likely to occur in June. Behind the dovish statement of the European Central Bank or the signal of being more eager to release interest rate cuts than the Fed, the eurozone economy is still facing a big test. In March, the euro area manufacturing PMI hit a new low in nearly three months less than expected, while the manufacturing industry of the top two economies (Germany, France) also continued to shrink, although its inflationary pressure has eased, the service PMI has also improved, but the market's expectations for the European Central Bank to start cutting interest rates earlier than the Fed still suppressed the euro. Similarly, the Bank of England (BoE) has sent a clear dovish signal while keeping interest rates unchanged. On 21 March, the Bank of England's Monetary Policy Committee (MPC) voted 8 to 1 to keep the benchmark interest rate at a 16-year high of 5.25%, with two of the most hawkish members having dropped their support for a rate hike and one member supporting a rate cut. Officials are dovish for a similar reason to Switzerland, namely that the UK has made some progress in fighting inflation. The data showed that UK inflation in February had eased to 3.4% from 4% in January, the lowest level in nearly two and a half years. Looking ahead, the Bank of England expects inflation to be just below 2% by the summer, at which point it is expected to start a rate cut cycle, but also stressed the need to continue to focus on the situation in the Red Sea or pose a "significant risk" to another spike in prices. Other advanced economies that have chosen to "stand still" include Sweden, New Zealand, Australia, Canada and South Korea. According to the timeline, the Riksbank announced on February 1 that it would maintain the benchmark interest rate at 4%, and said that if inflation falls further, it does not rule out the possibility of cutting interest rates in the first half of this year. The Reserve Bank of New Zealand (RBNZ) announced on 28 February that it would keep the official cash rate at 5.5% for the fifth consecutive time, while repeatedly underlining concerns about stubborn inflationary pressures and hinting at a possible rate hike if necessary. The Bank of Canada announced on March 6 that it would keep its benchmark interest rate at 5% for the fifth consecutive time and continue its quantitative tightening policy, while the Bank of Australia (RBA) issued a statement on March 19 to keep its benchmark interest rate at 4.35% for the third time in a row, while reaffirming its commitment to deflation. In addition to considering its own factors, the monetary policy of emerging economies will also be affected by the spillover from developed countries, so it will also enter the interest rate cut cycle faster. In the first quarter, the Argentine central bank took the lead in cutting interest rates by 20 percentage points, while the central banks of Brazil and Chile both lowered interest rates by 1 percentage point, while the central bank of Turkey staged a "violent" interest rate hike "against the trend", with a cumulative increase of 7.5 percentage points.
Specifically, in view of the easing of inflationary pressures, Argentina's central bank announced on March 11 that it would cut its benchmark interest rate from 100% to 80%, while liberalizing the minimum term interest rate from the following day. Previously, the country faced a severe inflation problem, with a cumulative inflation rate of 211.4% in 2023, the highest since 1990. Brazil's central bank continued its accommodative tone since August last year, cutting its key interest rate twice by a total of 1 percentage point. In the opinion of analysts, Brazil's central bank hopes to stimulate consumption and investment and promote full employment. Affected by the sluggish global economic recovery, commodity prices were previously depressed, which adversely affected the local economy. In addition, the central banks of Chile, Peru, Mexico and other countries have also joined the camp of interest rate cuts, and the key interest rates have been reduced by 1, 0.5 and 0.25 percentage points respectively to 7.25%, 6.75% and 11% in the first quarter. In addition to the five central banks mentioned above, many central banks in emerging market economies have chosen to "wait a little longer" in order to balance economic growth and inflation risks, or to support relatively fragile local currencies. For example, Bank Negara Malaysia's announcement on March 7 that it would continue to keep its benchmark interest rate at a nearly five-year high of 3% also allows the authorities to continue to provide limited policy support within their capacity to support the currency, which recently hit a 26-year low. Similarly, Bank Indonesia announced on March 20 that it would keep interest rates unchanged to support the still-fragile local currency, marking the fifth consecutive month that it has kept its benchmark interest rate at 6%, the highest level in the country in nearly five years. In the complex and volatile geopolitical situation, the Bank of Russia has also been in the spotlight, and after taking into account factors such as stabilizing the economy, controlling inflation and the labor market, it has kept its benchmark interest rate unchanged at 16% for two consecutive times this year. In addition, the central banks of Thailand, Vietnam, South Africa, India, Saudi Arabia and other places also maintained stable interest rates in the first quarter. However, in the midst of the "fall or stabilize" wave, Turkey's central bank once again showed its difference, and in contrast to the dovish style of the Bank of Japan, the central bank announced the end of the tightening cycle in January, followed by a surprise "violent" rate hike in March, indicating that "monetary policy will continue to tighten if inflation continues to worsen in the future." "Behind the 7.5 percentage point rate hike in the first quarter is the urgent pressure on the Turkish central bank caused by hyperinflation and currency depreciation. However, it remains to be seen whether the tightening policy will be effective in controlling inflation, and Wang Youxin, a senior researcher at the Bank of China Research Institute, believes that on the one hand, real interest rates remain negative and will not necessarily have the effect of curbing demand, and on the other hand, excessive interest rate hikes may further dampen economic activity and cause broader problems. Although there are still inflation rates in many countries that have not yet reached the expected target, as long as the subsequent downward trend of inflation does not deviate significantly from the trajectory, the market still generally expects that the background of this year's interest rate cut year will not change, but as the Fed hawks lead to the continuous postponement of interest rate cut expectations, more and more central banks will delay the pace of interest rate cuts. According to the pricing of the first rate cut by the G10 central banks in the interest rate derivatives market released in late March, the market widely expected that the Riksbank would cut interest rates for the first time in May, the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Canada would start to cut interest rates for the first time in June, and the Reserve Bank of New Zealand and the Reserve Bank of Australia would cut interest rates for the first time in August. However, given that the latest US inflation data for March once again exceeded expectations across the board, and inflation stickiness is still stubborn, the probability of a Fed rate cut in June seems to have been significantly reduced, according to the latest CME "Fed Watch", the probability of a 25 basis point rate cut by the Fed by June has dropped from 56% before the March data to about 21.7%. However, if international energy prices do not rise sharply, the European Central Bank and the Bank of England may still cut interest rates in June. Specifically, given that inflation in the euro area has gradually declined towards the 2% target, and a number of ECB officials have also made their dovish stance clear, the market expects that the ECB is likely to cut interest rates in June ahead of the Fed, but due to inflation concerns, the room for interest rate cuts in the euro area in the future may be relatively limited. As for the Bank of England, following the release of the country's February inflation data and the March shop price index, the market has increased the probability of the Bank of England cutting interest rates as early as June to 50%, while the market generally believed that the Bank of England could usher in its first cut as early as August. For example, in the view of Roger Barker, policy director of the British Institute of Directors, one of the British think tanks, the British inflation control has achieved obvious results, so it is appropriate for the Bank of England to cut interest rates as soon as possible. In emerging market countries, Morgan Stanley economists have postponed the timeline of interest rate cuts by Asian central banks in anticipation of a smaller Fed rate cut, arguing that Asian central banks will not cut interest rates before the Fed, as high interest rates in the United States have heightened concerns about the impact of potential monetary weakness on inflation, and suggested that regional central banks will start cutting interest rates in August instead of at the end of June, and that the rate cuts will be smaller. It is worth mentioning that due to the continuous delay in the Fed's interest rate cut expectations, the complex geopolitical situation has led to the increase in safe-haven demand, and the dollar index has continued to rise under the joint promotion of multiple factors, and the dollar index rose by more than 1.4% in the week ended April 12, recording the largest weekly increase in nearly a year and a half, and also brought a lot of pressure on emerging economies to intervene in the exchange rate. As of 12 April, most emerging market currencies were lower against the US dollar. Among them, the Chilean peso, the Thai baht, the Brazilian lira and the Malaysian ringgit fell more sharply, reaching about 8%, 6.7%, 4.6% and 3.6% respectively. In addition, the Philippine peso and the Indian rupee also recorded declines, while only the Mexican peso and the Peruvian nuevo sol rose slightly. Bank of Thailand officials recently stressed that they are closely monitoring exchange rate fluctuations and have made it clear that they will intervene if necessary. In addition, the central bank has already taken action, such as the Indonesian rupiah fell to a nearly four-year low on April 2, and the central bank immediately bought the rupiah further and sold the dollar to limit the depreciation. In addition, the "unexpected" rate cut by the Central Bank of Peru may also be related to this. According to foreign media reports, the central bank of Peru has been frequently selling dollars in recent months to boost the Peruvian new sol. Officials in the country have also previously said that the goal of the intervention is to reduce exchange rate fluctuations. Paul Mackel, head of global FX research at HSBC, said Asian central banks could not let their guard down. Given that weaker currencies tend to exacerbate price pressures, the last mile of inflation may be difficult to deal with not only for the United States, but also for many other economies.
Source of this article: Xinhua Finance
Author: Zhai Zhuo
WeChat editor: Wang Qian
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