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Central Bank Wrap Up (Weekly Insights 3/25/2024) Thumbnail

Central Bank Wrap Up (Weekly Insights 3/25/2024)

Key Takeaways:

  • More than twenty central banks held policy decision meetings last week.
  • Bank of Japan puts an end to negative interest rate regime.
  • Federal Reserve keeps rates unchanged, pencils in three cuts for 2024.
  • Bank of England moves forward with a dovish pause.
  • Swiss National Bank becomes first major central bank to cut interest rates.

Last week, central banks responsible for setting policy on six of the ten most-traded currencies met to decide the path forward for nearly half of the global economy.1 The Bank of Japan announced the end to the world’s last negative interest rate regime. The Federal Reserve kept interest rates unchanged as the Committee continues to see an economy that is “performing well.” The Bank of England kept interest rates unchanged but hinted rate cuts could be on the horizon amid inflation  falling faster than expected. This week, we review the busy week for monetary policy decisions and what it means for markets going forward.   

  • Bank of Japan ends negative rates: Inflation in Japan has exceeded the BOJ’s 2% inflation target since April 2022. As a result, the Bank of Japan raised their policy rate for the first time in seventeen years, in a decision that ended eight years of negative interest rates. The central bank also announced plans to abandon its yield curve control policies which capped long-term interest rates around zero. However, BOJ Governor, Kazuo Uedam noted the need to maintain an accommodative policy stance until inflation expectations settle at 2%.
  • Federal Reserve maintains policy: As inflation has reaccelerated in the U.S., the Federal Reserve is committed to navigate the “bumpy road” to 2%, according to Chairman Powell. The Committee kept interest rates unchanged but suggested the possibility of three rate cuts this year. Powell told reporters cuts are “likely to come at some point this year,” but the Committee needs “more confidence” inflation is on track to 2%. The Committee increased their estimate for 2024 GDP growth to 2.1% (from 1.4% in December), but also increased their estimate for core inflation to 2.6% (from 2.4%).
  • Bank of England delivers dovish pause: The Monetary Policy Committee in England voted 8-1 in favor of keeping rates unchanged at 5.25% (one member voted for a 25bps cut). This was the first time in this tightening cycle no members voted for rate increases. Governor Andrew Bailey confirmed “we’re not yet at the point where we can cut interest rates, but things are moving in the right direction.” He also noted that key indicators of inflation remain elevated.”
  • Swiss National Bank shocks market: The Swiss National Bank became the first major central bank to cut interest rates (by 25bps) in a move that surprised markets. The bank sees inflation remaining below 2% (currently at 1.2% YoY) “over the next few years.” Officials also revised their expectations for consumer prices lower to 1.4% (from 1.9%) for 2024. President Thomas Jordan noted policy easing “has been made possible because the fight against inflation has been effective.”2    

The Bottom Line: 

The move by the Bank of Japan solidifies the view that investors need to adapt to  the end of easy global monetary policy. We agree with market expectations that the peak in the Fed funds rate has been reached but we are not as optimistic about the Fed’s flexibility. We still think rate cuts are a 2H 2024 story but think the Fed needs to be very careful not to reignite inflation by taking a dovish stance. Commodity prices remain a significant threat to the work the Fed has done to reduce inflation.  

1: https://www.bloomberg.com/news/articles/2024-03-16/world-economy-latest-fed-and-boj-dominate-crucial-week-for-central-banks

2: https://www.bloomberg.com/news/articles/2024-03-21/rate-cuts-latest-inflation-scare-fades-as-snb-leads-way-for-fed-ecb-boe

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