The timing of multiple central banks suspending interest rate hikes and cuts has attracted attention
Since December, many central banks around the world have chosen to pause their interest rate hikes, and the market focus has further shifted towards the timing of interest rate cuts. Analysis indicates that the Federal Reserve has released a certain signal of interest rate cuts, while the attitudes of the European Central Bank and the Bank of England are more cautious, and the Bank of Korea may lower interest rates later under the pressure of weak economic growth.
Multiple central banks suspend interest rate hikes
The Federal Reserve's monetary policy meeting in December will keep the target range of the federal funds rate unchanged between 5.25% and 5.5%. This is the third consecutive time since September this year that the Federal Reserve has maintained this interest rate range unchanged.
The European Central Bank decided on the 14th to maintain its main refinancing rate, marginal lending rate, and deposit mechanism rate at 4.50%, 4.75%, and 4.00% respectively, but will accelerate the reduction of its balance sheet. Since July last year, the European Central Bank has raised interest rates 10 times in a row, with a cumulative increase of 450 basis points. With inflation levels noticeably falling, the European Central Bank suspended interest rate hikes in October this year.
The Bank of England (Bank of England) will maintain its key interest rate at 5.25% on the 14th. This is the highest level in 15 years. The Bank of England also maintained interest rates unchanged at its meetings in September and November, ending 14 consecutive rate hikes.
The Bank of Canada (Bank of Canada) held its monetary policy meeting in December for the third consecutive month, keeping its benchmark interest rate unchanged at the current level of 5%.
The Reserve Bank of Australia (RBA) announced in December that it will maintain its benchmark interest rate at 4.35% and the foreign exchange settlement balance rate at 4.25%. The Bank of Australia has raised interest rates five times this year, with the most recent being a 25 basis point hike to 4.35% announced last month. Bank of Australia Governor Michelle Bullock emphasized that ensuring inflation returns to the target range of 2% to 3% within a reasonable time is still a key task.
According to Yonhap News Agency, the Bank of Korea also decided to maintain its benchmark interest rate at the end of November at 3.5%. This is the seventh time since February, April, May, July, August, and October this year that the Bank of Korea has decided to maintain the benchmark interest rate unchanged.
During this round of interest rate hikes led by the Federal Reserve and the European Central Bank, the Bank of Japan has maintained a loose monetary policy to help inflation and the economy return to normal. The Bank of Japan announced at its monetary policy meeting on the 19th that it will continue to maintain ultra loose monetary policy, keeping the upper limit of its long-term interest rate control target at 1% and short-term interest rates at negative 0.1%. The Bank of Japan said that it would still maintain long-term interest rates at around zero by purchasing long-term treasury bond.
The Federal Reserve may be the first to cut interest rates
This year, global inflation has generally shown a easing trend, providing support for central banks to stop raising interest rates. In November, the inflation level in the United States has dropped from 9.1% in June 2022 to 3.1%; According to data from the Congressional Budget Office, inflation in the United States is expected to fall back to 2.1% by the end of 2024, approaching the Federal Reserve's target level of 2%. The inflation level in the eurozone has dropped from 10.6% in October 2022 to the current 2.4%. The Associated Press reported that the average global inflation level is expected to drop from 8.7% last year to 6.9% this year.
The Federal Reserve has recently issued a certain signal of interest rate cuts. Federal Reserve Chairman Powell stated after the monetary policy meeting in December that the current federal funds rate may be approaching the peak of this tightening cycle, and further rate hikes are unlikely, but this possibility cannot be ruled out. If the economy develops as scheduled, it is expected that the appropriate level of interest rates by the end of 2024 will be 4.6%. Wall Street traders currently anticipate that the Federal Reserve has a more than 80% chance of initiating interest rate cuts in March next year, with a total of six possible rate cuts for the entire year.
However, the European Central Bank and the Bank of England remain cautious about rate cuts.
The European Central Bank has not yet conveyed a clear signal of interest rate cuts. Analysts believe that the European Central Bank's confidence in inflation returning to its 2% target in the medium term has further increased, but there are still concerns that rising labor costs will exacerbate inflationary pressures. The timing of interest rate cuts in the eurozone may lag behind market expectations.
The President of the European Central Bank, Lagarde, stated that the December meeting did not discuss interest rate cuts, and that "it is not the time to relax vigilance", implying that only when the pressure of wage increases is eased can eurozone interest rates be lowered.
Kasten Brewski, head of Macro Research at the Dutch International Group, believes that the latest decision of the European Central Bank "confirms the end of the interest rate hike cycle", but the start of the interest rate cut cycle will be later than market expectations.
The inflation level in the UK fell to 3.9% in November, better than expected, but still significantly higher than the central bank's target. The Bank of England has hinted after its latest interest rate meeting that it will maintain high interest rates to cope with inflation and is unlikely to cut rates in the near future. Bank of England Governor Andrew Bailey said that there is still a way for policymakers to go in their efforts to curb inflation.
The market currently expects the Bank of England to cut interest rates by 0.25 percentage points in May next year. Samuel Tums, Chief Economist of the Pantheon Macroeconomics Research Company in the UK, stated that the unexpected decline in inflation means that the Bank of England is more likely to cut interest rates in the first half of 2024, far ahead of its current signals.
The Bank of Korea is expected to find it difficult to lower interest rates before the Federal Reserve. Analysis suggests that the Bank of Korea's seven suspension of interest rate hikes is due to the continued exacerbation of financial imbalances amidst sluggish economic growth and rising household debt in South Korea. However, household debt in South Korea has continued to grow rapidly since April this year, and the interest rate spread between South Korea and the United States has widened to a historic high. The possibility of a stronger US dollar and foreign capital outflows is higher than ever before. The situation faced by the Bank of Korea, which is unable to raise or lower interest rates, will continue until the first half of next year, and is expected to lower interest rates in the second half.
High interest rates drag down economic growth
The drag on economic activity caused by interest rate hikes by central banks around the world to curb inflation continues to manifest.
In the United States, high interest rates have had a serious impact on the real estate market. With the Federal Reserve raising interest rates, the interest rate on 30-year fixed rate home mortgages has risen from 4.16% in March 2022 to 7.79% in October this year. In the first 10 months of this year, sales of second-hand homes in the United States decreased by 20%. While housing sales have significantly declined, housing prices are still increasing, making it more difficult for many people to afford to buy a house.
The European economy is experiencing sluggish growth due to the drag of high interest rates. The latest forecast released by the European Central Bank on the 14th shows that the ECB has lowered its economic growth forecast for the eurozone in 2023 to 0.6%, and adjusted its growth forecast for 2024 and 2025 to 0.8% and 1.5%, respectively.
The economy of Germany, the largest economy in the eurozone, shrank by 0.1% month on month in the third quarter. The German central bank predicts that the German economy will continue to shrink in the fourth quarter. The German central bank has recently significantly lowered its economic growth forecast for next year from 1.2% to 0.4%.
The Bank of Canada said that Canada's economic growth came to a halt in mid-2023, with a 1.1% decline in gross domestic product in the third quarter. The higher interest rate level has suppressed spending, and the consumption growth in the past two quarters has been close to zero, and the economy is no longer in a state of excess demand.