Central Bank Tracker: Developed Market rate cut cycle is starting to broaden 

Insights for What’s Ahead

• Developed Market monetary policy is gradually shifting towards more interest rate cutters. In May, Sweden’s Riksbank became the second European central bank to cut rates this year, following a similar move by Switzerland’s central bank in March. In early June, central banks in Canada and the Euro Area joined the rate cutters group.
• However, the slowing disinflation progress and the challenge to complete the last mile on the way back to target ranges keep a number of major central banks, including the Federal Reserve and the Bank of England, from further broadening the Developed Market rate cut cycle.
• Our GDP-weighted Developed Market monetary policy rate average peaked in April at 4.26%. Rate cuts in Switzerland and Sweden in May and Canada and the Euro Area in early June have moved it down 13 basis points to 4.12%.
• However, the similarly weighted Developed Markets headline CPI inflation average inched up a tenth of a percentage point to 2.9% through the end of May, and it has not shown much downward momentum for the past five months.
• What’s driving the early Developed Markets rate cuts is not the belief that the inflation fight is over. Instead, it seems motivated by fine-tuning the level of monetary policy restrictiveness.

ECB, Canada, and Sweden broaden the Developed Market rate cut cycle, while the Federal Reserve and Bank of England stay with higher-for-longer policy

• As expected, the Federal Reserve (May 1) left the policy rate target range unchanged at 5.25%-5.50%. GDP growth slowed in Q1, but consumer price inflation, as measured by the personal consumption expenditure deflator, remains elevated. We still anticipate that the first 25bp interest rate cut will occur in November 2024 and be followed by another 25bp cut in December. (For more commentary, see Fed Puts Rate Cuts on Backburner, but Hikes Unlikely)
• Also widely anticipated in advance, the ECB (Jun 6) cut policy rates by 25 basis points at their June meeting. ECB President Lagarde stated that the bank had “more confidence that the disinflationary path is actually materializing.” Yet, at the same time, the bank’s staff macroeconomic projections raised the 2024 and 2025 inflation forecasts. Lagarde also stressed that monetary policy was “today more restrictive in real terms than we were back in September,” indicating that the rate cut was fine-tuning the level of restrictiveness more than the start of a rapid rate cut cycle.
• The Bank of Canada (Jun 5) also cut rates at their June meeting. GDP growth was weaker than expected in Q1, and inflation continued to fall slightly in April. At 2.7%, it was still above the mid-point of the bank’s 1% – 3% target range. Yet, the statement emphasized that “monetary policy no longer needs to be as restrictive.”
• Sweden’s Riksbank (May 8) became the second European central bank to cut interest rates this year. Monetary policy rates were lowered by 25 basis points to 3.75%. The bank’s statement highlighted that “inflation is approaching the target while economic activity is weak,” adding that “if the outlook for inflation still holds, the monetary policy rate is expected to be cut two more times during the second half of the year.”
• The Bank of England (May 9) left rates unchanged at 5.25% in May. The bank’s statement highlighted that services sector prices still rise at an unsustainable 6% clip. Yet, the Monetary Policy Committee’s voting record showed two of the nine members shifting their votes from hold to preferring a rate cut. More evidence of slowing inflation pressures may be needed, but the process of building a majority for a rate cut decision is underway.
• Norway’s Norgesbank (May 3) left monetary policy rates unchanged at 4.50%. Inflation at 3.6% remains well above target, and the bank’s policy statement still includes an explicit tightening bias stressing that “if a further increase in the monetary policy rate is judged necessary [..], the Committee is prepared to raise the policy rate again.”

• Both Australia’s RBA (May 7) and New Zealand’s RBNZ (May 22) left monetary policy rates unchanged at 4.35% and 5.50%, respectively. The RBA is facing an economy that weakened significantly in the second half of last year and an inflation trajectory that has stabilized above 3% in recent months. The situation in New Zealand is similar in terms of a weak growth backdrop coupled with inflation still too far above target. Hence, we don’t expect either bank to start cutting rates in the near future.

• The Bank of Korea (May 22) left monetary policy rates unchanged at 3.50%. GDP growth rebounded in Q1, and inflation at 2.9% is still some way off the bank’s 2% target, which has not created the right macro environment for a rate cut.