Global Central Banks re-evaluate as the big policy easing of 2024 fades out

Washington: The world’s main central banks were set to make an announcement six months ago that would have pleased credit card holders, home buyers, and company owners alike: a worldwide reduction in interest rates, which would cut borrowing costs and increase lending availability overall.

Rate cuts are “a topic of discussion out in the world and also a discussion for us,” Federal Reserve Chair Jerome Powell stated at a press conference in December of last year. At the time, investors were ecstatic about the prospect of looser financial conditions, and institutions like the International Monetary Fund were concerned that Powell and company would cut rates too quickly and jeopardize efforts to control inflation.

When major central banks faced inflation that turned out to be more persistent than anticipated and wage and economic growth that turned out to be more resilient, the coordinated relaxation of monetary policy that looked impending toward the end of 2023 has mostly failed.

A few small moves have been taken, like as the first cutbacks announced this month by the Bank of Canada and the European Central Bank.

Powell stated at last week’s press conference that the first step toward loosening policy will be “consequential,” following the Fed’s rapid hikes in interest rates in 2022 and 2023 to combat inflation. The Fed’s new projections indicate that policymakers only expect one quarter-percentage-point rate cut by the end of the year, as opposed to the three they had previously projected in December and March.

“When we do start to loosen policy, that will show up in significant loosening and financial market conditions,” Powell stated. “You want to get it right.”

Six months ago, Reuters polled economists and they predicted that the Bank of England would not lower borrowing prices until the third quarter, contrary to the practically consensus forecasts that the bank will act in August. In contrast, market pricing from December of last year suggested a first cut in May and three more during the year.

Although headline inflation has dropped to almost exactly the BoE’s 2% target, April’s inflation in the vital services sector was far higher than anticipated, and May’s 6% annual pay growth was still about twice the target level.

Therefore, it is anticipated that the BoE will hold rates during its final policy meeting under Prime Minister Rishi Sunak’s tenure, delaying the shift toward lower borrowing costs until after Britain’s election of a new administration.

Predictions by economists regarding the ECB’s initial action have also been accurate; a cut in June was anticipated. However, market pricing has once again changed significantly: in December, it was hinted that there would be 140 basis points of decreases in the upcoming year, beginning in March. As of right now, market prices hardly match one more rate reduction this year.

ECB President Christine Lagarde and her staff are still largely optimistic that inflation will continue to decline and reach the 2% objective by the end of 2025.

The current stringent wording regarding reduction, at least from Powell, may perhaps be more about controlling expectations than the real outlook; that is, leaving the possibility open that rates may remain where they are longer than expected for some time to come.

Data released shortly before and after the Fed meeting last week strongly suggested that price pressures were fading. Investors have mostly ignored Powell’s remarks and the Fed officials’ revised estimates, continuing to bet on rates falling starting in September.