The global wave of interest rate hikes is coming to an end, and expectations for a shift in monetary policy are rising.
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In 2023, against the background of continued high inflation, major central banks around the world will continue their monetary tightening trend and push interest rates to run at high levels. At the same time, the “side effects” of raising interest rates continue to emerge, and world economic growth has further slowed down, putting pressure on the prospects for tightening monetary policy. After nearly two years of interest rate hike cycles, major economies have slowed down the pace of interest rate hikes. “Dovish” signals have gradually emerged, and monetary policy has turned to expectations. The most radical wave of interest rate hikes in the past 40 years is gradually coming to an end.
Determined to raise interest rates but at a slower pace
In order to combat stubborn high inflation, many central banks will continue to tighten monetary policies in 2023 and raise interest rates multiple times. Interest rate increases remain the main tone of global central bank monetary policies.
Specifically, developed countries are still fulfilling their commitment to “maintain high interest rates for a longer period of time.” The Federal Reserve raised interest rates by 25 basis points in January, March, May and July 2023, bringing the total rate hikes to 100 basis points. The European Central Bank has raised interest rates six times in 2023, with a cumulative increase of 200 basis points. Among the three key interest rates, the deposit mechanism interest rate has reached a record high. The Bank of England has raised interest rates 14 times in a row since December 2021. In 2023, it will raise interest rates by a total of 175 basis points, with the benchmark interest rate rising to 5.25%. The central banks of Canada, Australia, Norway and other countries have also raised interest rates multiple times in 2023.
Some emerging market economies are also still in a monetary tightening cycle. For example, due to continued currency depreciation pressure and inflationary pressure, the Central Bank of Russia raised interest rates 5 times in 2023, with a cumulative increase of 850 basis points, and the benchmark interest rate rose to 16%; the Central Bank of Turkey raised interest rates 7 times in a row in 2023, with a cumulative increase of 850 basis points. 3,400 basis points, and the benchmark interest rate rose to 42.5%.
According to statistics from the International Monetary Fund, in the past two years of efforts to combat inflation, developed economies around the world have raised interest rates by an average of about 400 basis points, and emerging economies have raised interest rates by an average of about 650 basis points.
However, as inflationary pressures gradually ease, the pace of interest rate hikes by global central banks has slowed. Taking the Federal Reserve as an example, in 4 of the 8 monetary policy meetings in 2023, it announced a suspension of interest rate increases, and the rate of interest rate increases throughout the year was much smaller than the 425 basis points in 2022. The Fed emphasized that when determining the degree of further tightening, it will consider the cumulative degree of tightening of monetary policy, the degree of lag in the impact of monetary policy on economic activity and inflation, and economic and financial developments.
The Bank of England and the European Central Bank have also suspended interest rate increases from September and October 2023 respectively. The Bank of Korea kept its benchmark interest rate unchanged at most monetary policy meetings in 2023. Among the eight central banks of major economies that will hold monetary policy meetings in December 2023, seven have chosen to remain on hold.
Statistics from Reuters show that in the past year, the central bank that oversees the world’s 10 most actively traded currencies has raised interest rates a total of 38 times, with a cumulative rate of 1,200 basis points, which is less than the 54 rate hikes and 2,700 basis points in 2022. ; The central banks of emerging economies have raised interest rates by a total of 5,075 basis points, which is less than the 7,425 basis points in 2022.
Many countries are brewing a shift in monetary policy
Central banks around the world have slowed down the pace of interest rate hikes, mainly due to progress in fighting inflation and a slowdown in economic growth caused by tightening financial conditions. Against this background, market expectations for major economies to loosen monetary policies are gradually increasing.
Data from the U.S. Department of Commerce show that the year-on-year increase in the U.S. personal consumption expenditures price index in November 2023 narrowed compared with the previous month, indicating that U.S. inflation is “cooling.” The market generally believes that the current interest rate hike cycle of the Federal Reserve may have ended and that interest rates may be cut in 2024.
A “dot plot” of the Fed’s latest economic outlook shows that 17 of 19 Fed officials expect policy rates to be lower than current levels by the end of 2024, with most expecting rates to fall by 50 or 75 basis points base point. This means that if each rate cut is calculated by 25 basis points, the Fed will cut interest rates two or three times in 2024.
In addition to the United States, inflation rates in the euro zone and the United Kingdom also hit their lowest levels in more than two years last November. Economists at the Center for European Economic Research said that if the inflation rate continues to fall sharply in January this year, the European Central Bank “should implement its first interest rate cut in the spring.” In response to the sharp slowdown in inflation and continued economic weakness, market institutions believe that the Bank of England may cut interest rates earlier than previously expected.
As an “outlier” in this round of interest rate hike cycles in developed economies, the Bank of Japan will continue to maintain ultra-loose monetary policy in 2023. However, given that inflation continues to rise, the market expects that the Bank of Japan may promote the normalization process of monetary policy this year. As of November last year, Japan’s core inflation rate had exceeded the 2% target set by the Bank of Japan for 20 consecutive months.
In response to the uncertainty of the economic outlook, emerging economies are increasingly inclined to adjust or even reverse monetary policy. Statistics from the Bank for International Settlements show that in 2023, the number of emerging markets and developing countries that have stopped raising interest rates or chosen to cut interest rates continues to increase, from 7 in the first half of the year to 16 in the second half, including Chile, Brazil, Peru, and Indonesia. , Saudi Arabia, Hungary, Czech Republic, Poland, etc.
Dean Turner, chief economist for the Eurozone and UK at UBS Global Wealth Management, believes that slowing global economic growth, easing inflationary pressures and cooling labor markets will open the door for major central banks to cut interest rates this year.
Reuters analysis pointed out that the Federal Reserve’s eye-catching “dovish” shift has strengthened people’s judgment that interest rate cuts will come earlier and faster. However, with the exception of the Federal Reserve, central banks in other regions, including Europe, have not explicitly responded positively to expectations of interest rate cuts, and the market and policy makers may differ on the timing of interest rate cuts.
Fighting inflation and stabilizing growth are difficult to balance
Although the global monetary policy environment has shown signs of adjustment, many countries are still cautiously seeking a balance between fighting inflation and stabilizing growth, and there is still uncertainty about the future policy transition process.
On the one hand, although inflation has declined, it is still at a high level and there is a possibility of rebound. For example, inflation in Europe, which is troubled by energy prices and labor costs, continues to be higher than the target level. The European Central Bank predicts that the rate of decline in inflation in the euro area will slow down in 2024.
On the other hand, as interest rates continue to rise sharply, the risks of the banking industry in the United States and Europe have increased sharply, global liquidity has deteriorated, the risk of debt defaults in emerging economies has increased, and the negative impacts and potential risks brought about by the tightening of financial conditions have continued to accumulate, leading to economic growth. The speed slowed down further.
Recent data shows that growth in many major economies around the world is weak. In the third quarter of 2023, the Eurozone economy shrank by 0.1% month-on-month, the EU economy grew at zero month-on-month; the British economy grew at zero month-on-month; the Japanese economy fell by 0.5% month-on-month, and the annual rate of decline was 2.1%, which was the first quarterly negative growth last year.
Faced with the dilemma, global central banks remain cautious in their actual decision-making and management of expectations. The European Central Bank deleted its previous statement that inflation may be “too high for too long” in its latest forward guidance on monetary policy, but still believes that “now is not the time to relax our vigilance.” Federal Reserve Chairman Jerome Powell said that although the Fed has made progress in reducing inflation, it still has a long way to go and the Fed is carefully evaluating whether more action is needed. The Reserve Bank of Australia said it would take time to assess the impact of rising interest rates on demand, inflation and the labor market.
Analysis by the Financial Times, Yonhap News Agency and other media pointed out that the next actions of the central banks of major economies will rely on economic data. They will find ways to “carefully maintain” their reputation for maintaining price stability while maintaining economic growth. Complete the “last mile” of fighting inflation.
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