60% of Top 10 Central Banks End Tightening Era
US Likely to Cut Rates This Month... Big Cut Expectations Rising
As inflation triggered by COVID-19 eases, global central banks are accelerating moves to cut interest rates.
Among the top 10 advanced economies' central banks, six have started monetary policy easing this year. The European Central Bank (ECB) on the 12th (local time) cut the deposit rate by 0.25% points from 3.75% to 3.50%. This came three months after lowering the policy rate from the historically highest level in June, marking a shift from tightening to easing monetary policy.
Switzerland, which was the first Western country to begin rate cuts in March, also lowered rates in June and is expected to cut again on the 26th. Having succeeded in controlling inflation, Switzerland is concerned that the strong Swiss franc will hurt exports. Sweden cut rates in May, and another cut is expected on the 25th.
The UK started cutting rates in August and is expected to make additional cuts in November. New Zealand decided on its first rate cut in August, with further adjustments expected in October.
Canada, which has decided on three consecutive cuts since June, is expected to cut another 0.25% points next month. The Bank of Canada is rushing monetary easing to prevent a recession. In Canada, the unemployment rate was recorded at 6.6% in August, raising concerns that employment is weakening more sharply than expected. The largest Canadian bank, CBIC, forecasted policy rate cuts of 0.5% points each in December this year and January next year.
The US, entering the rate cut cycle late, is almost certain to cut rates at the Federal Open Market Committee (FOMC) meeting on the 18th. The market is pricing in a 0.25% point rate cut, while the prospect of a 'big cut' (0.5% point cut) is also rapidly emerging. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market reflects a 51% probability of a 0.5% point cut at the September FOMC. John Faust, an advisor to Federal Reserve (Fed) Chair Jerome Powell, and William Dudley, former president of the New York Fed, are reportedly advocating for a big cut.
Norway and Australia are slower to shift monetary policy. The Norges Bank kept its policy rate at the highest level in 16 years last month. This is because tightening is expected to be necessary for some time to curb inflation. The market expects Norway to cut rates only in December. Australia, where inflation remains high, has maintained rates since the November rate hike last year, and the market sees less than a 50% chance of an Australian rate cut within this year.
Japan, in contrast to the rest of the world, raised rates twice in March and July. The market expects the Bank of Japan (BOJ) to raise rates once more in December to curb inflation. There are concerns that the narrowing interest rate gap between the US and Japan could cause a sharp rise in the yen’s value, potentially triggering a sell-off in global financial markets and a recurrence of yen carry trade unwinding.
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