The US Federal Reserve Building in Washington. — Reuters
NEW YORK: Global policymakers aren’t about to let the US Federal Reserve’s (Fed) delay in cutting interest rates distract them too much from their own easing efforts.
Among the 23 of the world’s top central banks featured in Bloomberg’s quarterly guide, only the Bank of Japan (BoJ) won’t end up lowering borrowing costs within the next 18 months.
Most are already set to do so this year.
In total, 155 basis points will be removed from an aggregate benchmark global rate compiled by Bloomberg Economics by the end of 2025.
Even the Fed itself, whose plans for cuts in borrowing costs went awry in the face of stubborn US inflation, will still end up delivering a couple of moves this year, the forecasts showed.
What is clear now is that prospects are dwindling for a swift removal of the unprecedented global tightening delivered during the post-pandemic cost of living crisis.
In tandem with the caution of their US peers, central bankers worried about lingering consumer price pressures are seen adopting a far gentler trajectory downwards for rates than they did on the way up. Easing throughout the advanced world is also turning out to be relatively unsynchronised.
In Europe for example, the Swiss National Bank (SNB) has already cut rates twice this year, the European Central Bank (ECB) has moved once, the Bank of England (BoE) has yet to do so and Norwegian officials just signalled that they’re unlikely to act before 2025.
The global easing push could still suffer further setbacks, as the Fed and ECB have already shown. Australia’s central bank isn’t even ruling out another hike.
Bloomberg Economics said: “Post-pandemic inflation has ripped up the central bank playbook.
“The normal ‘up on the escalator, down on the elevator’ pattern has been reversed, with rates rising swiftly and falling slowly.
“The Fed’s pull as a global anchor appears diminished, with the ECB, SNB and many emerging markets charting their own course.
“The overall picture is cuts coming later, ower and less synchronised than expected at the start of the year.”
But with the second half of the year dawning, the prospect of looser constriction looks increasingly likely to materialise for much of the world.
The Fed officials have pencilled in one rate cut this year, according to the median projection released in June, and all eyes will be watching for clues about whether that could come during the third quarter, towards the end of the year instead, or perhaps even later.
Policymakers have been offering a cautious outlook about the timing for the start of easing after data in early 2024 stoked fears of stalling progress on lowering inflation.
But some Fed officials have highlighted more recent figures that suggest pressures are again weakening. A key measure of underlying growth in consumer prices slowed in May for the second straight month.
Still, some officials have said it’s important not to overemphasise a few encouraging inflation prints.
Fed chairman Jerome Powell has stressed policymakers will be relying on a range of data, including on the labour market and prices, as they decide when it will be appropriate to lower rates.
Bloomberg Economics Anna Wong said: “Inflation surprised to the high side early in 2024, and June’s dot plot showed one 25-basis-point cut this year.
“However, Powell has said ‘unexpected’ labour-market weakening could prompt faster cuts.
“We see unemployment rising to 4.2% by September, and even with core personal consumption expenditures inflation still above target, the Fed will likely start easing then. We expect cuts in September and December, for a total of 50 basis points (bps) this year, followed by 100 bps of cuts in 2025.”
Having lowered rates in June for the first time since its spate of hikes, the ECB isn’t rushing to do more just yet.
Inflation, in a gradual retreat, won’t sustainably hit the 2% target until near the end of 2025, according to the central bank’s latest batch of quarterly projections unveiled by president Christine Lagarde.
Wage growth, particularly in the services sector, is keeping consumer price gains elevated and officials nervous about loosening monetary policy too hastily.
A rate cut at this month’s meeting is all but ruled out. That makes September the next opportunity to move.
“After upticks in its official time series on negotiated wages, services inflation and compensation per employee, the ECB is reluctant to cut again without more evidence that cost pressures are easing,” said Bloomberg Economics’ David Powell.
“We expect a pause in July, but slower wage growth in the second quarter should unlock more action in September.
“That may be followed by another move in December, when headline inflation is likely to be below target, making such a restrictive stance hard to justify.”
Meanwhile, the BoJ’s highlight for this quarter could come as early as this month.
Governor Kazuo Ueda is set to unveil a plan for quantitative tightening that reduces bond buying at this month’s gathering. A simultaneous rate hike can’t be ruled out.
Currencies are likely to keep complicating the BoJ’s job. The weak yen has already weighed on households and small businesses by inflating import costs, which is one reason the economy contracted twice in the past three quarters. — Bloomberg
