As inflation is slowing down in many economies, investors are watching interest rate decisions closely for the possibility of upcoming rate cuts in 2024. Markets are looking forward to several rate cuts in 2024, although rates are expected to stay high this year.
World central banks raised policy rates significantly in early 2022 to reduce inflation. Economists have predicted that rates will gradually reduce later this year.
The Stance of Different World Central Banks
World central banks are tightening monetary policies; however, China and Japan have taken a different stance, making them stand out as exceptions. Beijing has started to ease its rates, according to the global intelligence firm.
The EIU also expects the Bank of Japan to abandon its negative interest rate policy in the second quarter.
Jerome Powell, the Chair of the US Federal Reserve, stated last week in his congressional testimony that the interest rates might start to decrease this year if the data on inflation start going the 2% goals. However, he gave no indication when that time would be.
According to PCE, the Fed’s preferred inflation data, inflation is currently at an annual rate of 2.4%, higher than the Fed’s 2% target. During its January meeting, the Federal Reserve decided to keep interest rates unchanged at 5.25% to 5.5%.
Markets are now anticipating a 25-basis-point rate cut in 2024, which will begin in June.
Last week, the European Central Bank kept its policy rate at a high of 4%, showing signs that there will be no rate cuts in 2024 until June.
The European Central Bank said that inflation is decreasing more quickly than expected and has revised its annual inflation forecast down from an average of 2.7% to 2.3%. The ECB aims for a 2% inflation rate.
In February, the Swiss inflation increased by 1.2% from a year earlier, making it the lowest level in 2.5 years. This has raised hope that the Swiss National Bank might introduce interest rate cuts in 2024 during its March 21 meeting.
The Swiss National Bank (SNB) currently has a policy rate of 1.75%, and its inflation target range is between 0% and 2%. LSEG data have shown that there is more than a 40% chance of a 25-basis-point cut in March, which would lower the SNB’s key rate to 1.5%.
UBS anticipates that the SNB will likely wait until the second quarter for its initial key interest rate cut, though it does not remove the possibility of rate cuts in 2024 happening this month.
In March, the Bank of Canada decided to keep rates steady for the fifth meeting in a row. The governor mentioned that it was too early to think about introducing rate cuts in 2024.
Canada’s inflation rate decreased to 2.9% in January from a year ago, down from December’s 3.4% and within the BOC’s target range of 1% to 3%.
The Reserve Bank of Australia kept rates steady at a 12-year high of 4.35% in February. ANZ recently mentioned that Australia’s economy has seen a slowdown in the second half of 2023.
The fourth-quarter GDP only increased by 0.2% from the previous quarter, following a 0.3% increase in the third quarter.
While other world central banks are making decisions to introduce rate cuts in 2024, there is one bank that is going in the opposite direction. Economists are expecting the Bank of Japan (BOJ) to raise interest rates this year.
According to Oxford Economics and Macquarie economists, the BOJ is likely to remove its negative interest rate policy by April. This decision for the phasing out of the interest rate policy depends on how the annual wage negotiations go.
These negotiations play a crucial role in determining if Japan’s inflation has reached the BOJ’s 2% target, a required condition for ending the negative rate policy.
First Rate Cuts in 2024
Carl Weinberg, chief economist at High-Frequency Economics, says that the Bank of Canada (BOC) will most likely be the first to introduce rate cuts in 2024.
He said Canada’s Consumer Price Index (CPI), excluding shelter prices, is only increasing by 1.7%, below the central bank’s inflation goal. Weinberg added that all the prices the BOC can influence in the economy are rising less than what the inflation target requires.
Weinberg said that 2024 will see a shift in world central banks’ monetary policy, especially towards reducing interest rates.
However, according to Morgan Stanley, the Asian central banks will probably not be the ones to lower interest rates before the Fed does because most Asian currencies are weaker against the strong U.S. dollar.
This situation could result in higher inflation risks for these countries, even though inflation is starting to decrease. The economists at Morgan Stanley have said that in many Asian economies, inflation has either recently reached the target range or is still moving toward it.
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