Major central banks hold rates steady as markets eye rapid cuts

LONDON - Markets think it’s all over. After a lengthy and historic monetary tightening campaign to battle high inflation, major central banks are keeping high interest rates steady for now as traders price in rapid cuts ahead.

US Federal Reserve chair Jerome Powell said on Dec 13 that “we’ve done enough”. The European Central Bank (ECB) and the Bank of England (BoE) on Dec 14 left rates on hold, but the BoE pushed back against rate cut bets, while Norway surprised with a rate hike.

Major rate setters have hiked borrowing costs by 4,015 basis points (bps) so far this cycle, with Japan the holdout dove.

Here’s how they stand, in terms of the scale of rate hikes in this cycle.

United States

The Fed unleashed a fresh wave of optimism in markets on Dec 13 by

holding its key rate at 5.25 per cent to 5.5 per cent,

and releasing officials’ surprisingly dovish projections for 75 bps of cuts in 2024.

Mr Powell noted that inflation was easing faster than expected and rate cuts were coming “into view”, all but confirming that a period of aggressive monetary tightening by the world’s most influential central bank is over.

Markets raced ahead of Fed officials’ forecasts to predict the funds rate would be around 150 bps lower by December 2024.

New Zealand

The Reserve Bank of New Zealand held its interest rate at a 15-year high of 5.5 per cent in November, but surprised markets by upwardly revising its forecast for the peak in rates to 5.69 per cent.

Markets bet the central bank is finished with hikes, with easing priced in as early as May.

Britain

The BoE pushed back against market rate cut speculation on Dec 14, leaving its key rate at a 15-year high of 5.25 per cent and said rates would need to stay high for an “extended period”.

Markets trimmed rate cuts bets following that comment but still price in over 100 bps worth of easing in 2024.

Canada

The Bank of Canada on Dec 6 left its benchmark interest rate on hold at a 22-year high of 5 per cent but left the door open to another hike, saying that financial conditions have eased and it was still concerned about inflation.

Euro zone

The ECB is expected to be one of the first major central banks to start cutting rates in 2024 as the economic outlook sours.

It held its deposit rate steady at 4 per cent on Dec 14 and signalled an early end to its last remaining bond purchase scheme, wrapping up a decade-long experiment in hoovering up debt across the euro zone.

Markets price in roughly 140 bps worth of rate cuts in 2024.

Norway

The Norges Bank raised its key rate by 25 bps to 4.5 per cent in a decision that surprised markets, adding that it would likely stay put for some time from here.

While core inflation in November at 5.8 per cent was below the central bank’s 6.1 per cent forecast, the Norwegian krone has traded consistently weaker than it expected, potentially stoking inflation.

Australia

The Reserve Bank of Australia held interest rates steady in December at 4.35 per cent, and markets expect rate cuts from mid-2024.

Inflation slowed unexpectedly to 4.9 per cent in October and the economy barely grew in the third quarter as increased mortgage costs hit consumer spending.

Sweden

Economists and traders think Sweden’s central bank is likely done raising rates, after holding them at 4 per cent in November.

High borrowing costs have pressured commercial real estate firms. The International Monetary Fund expects Sweden’s economy to have contracted in 2023.

Swedish inflation slowed to 3.6 per cent year on year in November, down from 10.2 per cent in December 2022.

Switzerland

The Swiss National Bank (SNB) on Dec 14 held interest rates at 1.75 per cent for a second straight meeting after inflation stayed within the central bank’s 0 per cent to 2 per cent target for a sixth consecutive month in November.

Economists see the SNB holding rates until September, although money market pricing shows investors are eyeing cuts from March.

Japan

The Bank of Japan (BOJ) concludes a two-day meeting on Dec 19, and governor Kazuo Ueda will aim to recognise inflationary pressures without suggesting an imminent end to negative interest rates.

More than 80 per cent of economists expect the BOJ to end this long-held policy in 2024, with many tipping a move in April.

The BOJ in October changed a 1 per cent cap on Japan’s 10-year bond yield to a loose “upper bound”, enabling long-term borrowing costs to rise gradually. REUTERS