Interest rates begin to fall in Europe as the Fed lags behind

Interest rates begin to fall in Europe as the Fed lags behind
Interest rates begin to fall in Europe as the Fed lags behind

Global central banks that have united to fight inflation are starting to fall apart, with European rate-setters turning pessimistic, while the U.S. Federal Reserve remains cautious about cutting rates too soon of interest.

After the most aggressive global monetary tightening cycle in decades, here’s where major central banks stand and what they should do going forward.

1/ SWITZERLAND

The Swiss National Bank cut rates by 25 basis points to 1.50% in March, leaving the Swiss franc lagging behind the dollar and euro as traders bet on a further cut in June.

Swiss inflation rose to 1.4% in April, but remained within the SNB’s target for the eleventh consecutive month.

2/ SWEDEN

Sweden’s Riksbank cut its benchmark lending rates from 4% to 3.75% on Wednesday and said it would cut rates further if inflation remained subdued.

The rise in consumer prices slowed to just above the 2% target as Sweden’s economy stumbled under the pressure of high rates. The Riksbank’s next dilemma is the weak crown and the possibility that higher import costs will reignite inflation.

3/ EURO ZONE

The European Central Bank is expected to cut rates in June as inflation is close to its 2% target and growth is lukewarm. Markets anticipate nearly three declines this year.

The big question is how far the ECB can deviate from the Fed. Policymakers may worry that high U.S. inflation is a harbinger of what will happen in developed economies.

4/ CANADA

Canadian inflation hit 2.9% in March and population growth is boosting the economy, but Bank of Canada Governor Tiff Macklem’s optimism that price pressures will moderate has strengthened bets on a reduction in rates.

Traders consider there to be around a 60% chance that rates will be cut in June and expect borrowing costs to be reduced in July.

5/ BRITTANY

The Bank of England kept interest rates at 5.25%, their highest level in 16 years, but Governor Andrew Bailey said he was “optimistic that things are moving in the right direction” and a deputy governor voted for a reduction.

Mr Bailey said the BoE still needed to see more evidence that inflation – which stood at 3.2% in March – will remain low before cutting rates. Markets expect a first reduction in August.

6/ UNITED STATES

The Fed has kept rates in a range of 5.25% to 5.5% since July 2023. It held rates on May 1 and allayed some fears, following high inflation readings, that its next action or a new increase.

Wall Street’s S&P 500 index, which fell about 4% in April, recouped much of that loss as some Fed officials reiterated that rate cuts were to be expected, eventually. .

Operators who, in January, expected the Fed to cut rates by 150 basis points this year, are now counting on just over 40 basis points. A first rate reduction is planned for September.

7/ NEW ZEALAND

New Zealand inflation, at 4%, is expected to remain above the Reserve Bank of New Zealand’s 1%-3% target as migration increases domestic demand, the Organization said of economic cooperation and development this week.

Investors don’t expect rate cuts until October or November.

8/ AUSTRALIA

The Reserve Bank of Australia kept rates at a 12-year high of 4.35% on Tuesday. She is not expected to cut borrowing costs this year as she forecasts higher inflation and the government prepares households for tax giveaways starting in July.

Futures markets put the probability of an increase in August at 20%.

9/ NORWAY

Norway’s central bank became more optimistic on May 3, when it kept rates at 4.50% and warned they could stay at that level “longer than previously thought.”

This position is due to a robust economy and core inflation of 4.5%, well above the 2% target.

Norges Bank had considered a cut in September, but most economists now expect it would not come until December, or even next year.

10/ JAPAN

The Bank of Japan is a special case, since it raised its rates in March to exit negative territory for the first time in 17 years.

The move, however, failed to close the yawning gap between Japanese and U.S. borrowing costs, sending the yen to a 34-year low and prompting the government to intervene to boost the currency.

BOJ Governor Kazuo Ueda stepped up his hawkish rhetoric this week, saying the central bank could take action if the weak yen led to higher inflation.

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