The timing of suspension of interest rate hikes and reductions by central banks in many countries has attracted much attention
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Since December, many central banks around the world have chosen to suspend interest rate increases, and the market focus has further shifted to the timing of interest rate cuts. Analysis points out that the Federal Reserve has released a certain signal of interest rate cuts, while the European Central Bank and the Bank of England are more cautious. The Bank of Korea may cut interest rates later under the pressure of weakening economic growth.
Many central banks suspend interest rate hikes
The Federal Reserve’s December monetary policy meeting left the target range for the federal funds rate unchanged at 5.25% to 5.5%. This is the third consecutive time since September this year that the Fed has kept this interest rate range unchanged.
The European Central Bank decided on the 14th to maintain the main refinancing interest rate, marginal lending rate and deposit mechanism interest rate at 4.50%, 4.75% and 4.00% respectively, but will accelerate the reduction of its balance sheet. Since July last year, the European Central Bank has raised interest rates 10 times in a row, with a cumulative increase of 450 basis points. As inflation fell significantly, the European Central Bank suspended interest rate increases in October this year.
The Bank of England (Bank of England) kept its key interest rate unchanged at 5.25% on the 14th. This is the highest level in 15 years. The Bank of England also kept interest rates unchanged at its September and November meetings, ending 14 consecutive rate hikes.
The Bank of Canada’s December monetary policy meeting also kept the benchmark interest rate unchanged at the current level of 5% for the third consecutive month.
The Reserve Bank of Australia (Central Bank) announced in December that it would maintain the benchmark interest rate at 4.35% and the interest rate on foreign exchange settlement balances at 4.25%. The Reserve Bank of Australia has raised interest rates five times this year, with the latest announcement last month that it would raise the benchmark interest rate by 25 basis points to 4.35%. Reserve Bank of Australia Governor Michelle Bullock stressed that ensuring inflation returns to the target range of 2% to 3% within a reasonable time remains a priority.
According to Yonhap News Agency, the Bank of Korea also decided to keep the benchmark interest rate unchanged at 3.5% at the end of November. This is the seventh time the Bank of Korea has decided to keep the benchmark interest rate unchanged, following February, April, May, July, August and October this year.
During this round of interest rate hikes led by the Federal Reserve and the European Central Bank, the Bank of Japan has always maintained a loose monetary policy to help inflation and the economy get back on track. The Bank of Japan announced at the monetary policy meeting held on the 19th that it would continue to maintain an ultra-loose monetary policy, maintain the upper limit of the long-term interest rate control target at 1%, and maintain the short-term interest rate at a level of minus 0.1%. The Bank of Japan said it would still keep long-term interest rates around zero by purchasing long-term government bonds.
The Fed may be the first to cut interest rates
This year, global inflation has generally shown an easing trend, providing support for central banks to stop raising interest rates. In November, U.S. inflation has dropped to 3.1% from 9.1% in June 2022; data from the U.S. Congressional Budget Office predicts that by the end of 2024, U.S. inflation will fall back to 2.1%, close to the 2% target set by the Federal Reserve. target level. Eurozone inflation has dropped from 10.6% in October 2022 to the current 2.4%. The Associated Press reported that the average global inflation level is expected to drop to 6.9% this year from 8.7% last year.
The Federal Reserve has recently released a certain signal to cut interest rates. After the December monetary policy meeting, Federal Reserve Chairman Powell said that the federal funds rate may be close to the peak of this tightening cycle and that further interest rate increases are unlikely, but this possibility cannot be ruled out. If the economy develops as expected, the appropriate level of interest rates is expected to be 4.6% at the end of 2024. Wall Street traders currently predict that there is more than 80% chance that the Federal Reserve will start cutting interest rates in March next year, and that there may be a total of six rate cuts throughout next year.
However, the European Central Bank and the Bank of England remain cautious about cutting interest rates.
The European Central Bank has yet to send a clear signal to cut interest rates. Analysts believe that the European Central Bank is more confident that inflation will return to its 2% target in the medium term, but it is still worried that rising labor costs will intensify upward pressure on inflation. The timing of interest rate cuts in the Eurozone may lag behind market expectations.
European Central Bank President Christine Lagarde said there was no discussion of an interest rate cut at the December meeting and “now is not the time to let down our guard,” suggesting that a cut in euro zone interest rates may only be possible when rising wage pressures ease.
Carsten Brzeski, head of ING’s macro research department, believes that the ECB’s latest decision “confirms the end of the interest rate hike cycle,” but the start of the interest rate cut cycle will be later than market expectations.
British inflation fell to 3.9% in November, which was better than expected but still significantly higher than the central bank’s target. The Bank of England hinted after its latest interest rate meeting that it will maintain higher interest rates to combat inflation and is unlikely to cut interest rates in the near future. Bank of England Governor Andrew Bailey said policymakers’ efforts to curb inflation “still have some way to go”.
The market currently expects the Bank of England to cut interest rates by 0.25 percentage points in May next year. Samuel Toombs, chief UK economist at Pantheon Macroeconomics Research, said the unexpected drop in inflation means the Bank of England is more likely to cut interest rates in the first half of 2024, much earlier than it has signaled so far.
The Bank of Korea is expected to find it difficult to cut interest rates ahead of the Fed. Analysts believe that the Bank of Korea suspended interest rate hikes seven times because financial imbalances continue to ferment amid sluggish economic growth and rising household debt. However, South Korean household debt has continued to grow rapidly since April this year, and the interest rate gap between South Korea and the United States has widened to a record high. The possibility of a stronger U.S. dollar and foreign capital outflows is higher than ever. The situation faced by the Bank of Korea of being “unable to raise or lower interest rates” will continue into the first half of next year, and it is expected to cut interest rates in the second half of the year.
High interest rates drag down economic growth
The drag on economic activity caused by interest rate hikes by many central banks around the world to curb inflation continues to show.
In the United States, high interest rates have had a severe impact on the housing market. As the Federal Reserve raises interest rates, the 30-year fixed-rate home mortgage loan interest rate has increased from 4.16% in March 2022 to 7.79% in October this year. In the first 10 months of this year, U.S. second-hand home sales fell 20%. While home sales have plummeted, home prices have continued to rise, making home ownership more unaffordable for many people.
The European economy is growing sluggishly, dragged down by high interest rates. The latest forecast released by the European Central Bank on the 14th shows that the European Central Bank has lowered its economic growth forecast for the Eurozone in 2023 to 0.6%, and adjusted its growth forecasts for 2024 and 2025 to 0.8% and 1.5% respectively.
The economy of Germany, the largest economy in the euro zone, shrank by 0.1% in the third quarter. The Bundesbank expects the German economy to shrink in the fourth quarter. The Bundesbank recently slashed its economic growth forecast for next year from 1.2% to 0.4%.
Canada’s economic growth stalled in mid-2023, with gross domestic product falling 1.1% in the third quarter, the Bank of Canada said. Higher interest rates have curbed spending, consumption growth has been close to zero over the past two quarters, and the economy is no longer in a state of excess demand.
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