Global Central Banks Recalibrate as Policy Easing of 2024 Fizzles

Global Central Banks Recalibrate as Policy Easing of 2024 Fizzles

Sub: Economy

Sec: Monetary policy

Overview:

• End of 2023 Expectations:
  • Major central banks were expected to shift to lower interest rates, making borrowing cheaper.
  • Optimism was high among investors and organizations like the International Monetary Fund (IMF).
• Reality Check:
  • Persistent inflation and resilient economic and wage growth have largely halted the anticipated joint easing of monetary policy.

Key Developments:

• Federal Reserve’s Position:
  • In December 2023, Fed discussed the possibility of rate cuts, raising hopes for looser financial conditions.
  • By mid-2024, the Fed anticipated only a single quarter-percentage-point rate cut by year-end, down from three cuts projected earlier.
  • Fed emphasized the need to get policy right, indicating the initial move to loosen policy would be “consequential.”
• Economists vs. Markets:
  • Economists consistently predicted fewer rate cuts than market expectations.
  • In December, markets expected the Bank of England (BoE) to cut rates by May, but economists forecasted a third-quarter cut, which is now widely expected in August.
  • Similarly, the European Central Bank (ECB) was expected by economists to make its first cut in June, while market pricing implied multiple cuts throughout the year.
• Current Central Bank Actions:
  • European Central Bank and Bank of Canada made modest initial cuts in response to earlier promises when inflation seemed to be falling faster.
  • Bank of England is expected to hold rates steady in its last policy meeting before Prime Minister Rishi Sunak’s term ends, delaying the move toward lower borrowing costs.

Inflation and Economic Growth:

• Headline Inflation and Wage Growth:
  • BoE faced higher-than-expected inflation in the services sector and substantial annual wage growth, delaying rate cuts.
  • ECB officials warned of “bumps in the road” as they aimed to bring inflation back to the 2% target by the end of 2025.

Managing Expectations:

• Central Bank Messaging:
  • Powell’s December comments seemed to solidify views that rate cuts were imminent, but the reality has been more measured.
  • ECB and other central banks are balancing inflation control with economic growth, aiming to avoid overly restrictive policies that could harm fragile recoveries.

Conclusion:

• Symbolic vs. Actual Impact:
  • While the timing of the first-rate cut is symbolically important, its macroeconomic effect might be less significant.

Summary:

The anticipated global shift to lower interest rates in 2024 has largely fizzled, with major central banks confronting persistent inflation and resilient economic growth.

Economists have been more accurate than markets in predicting the timing and extent of rate cuts, reflecting a cautious approach by central banks like the Federal Reserve, Bank of England, and European Central Bank. Managing expectations remains crucial as central banks navigate the trade-offs between inflation control and economic growth.