Central banks raise rates again, end in sight.

Central banks raise rates again, end in sight.

Global Central Banks Nervously Eyeing the End of Interest Rate Hikes

London

Inflation has been a top concern for major central banks across the world. However, there are signs of relief as price pressures finally start to ease. While inflation remains high, certain economies have witnessed a faster cooling than expected. This delicate situation has central banks on the edge, as making the wrong decision could have significant consequences for the economy.

Heightened inflationary pressures have prompted nine developed economies to raise interest rates by a combined 3,840 basis points in this cycle. Japan stands out as the dove among them, yet the remaining central banks face challenging decisions about when to pause the aggressive rate hikes. Pausing too early could result in loose financial conditions, potentially reigniting inflationary pressures. On the other hand, stopping too late could trigger a credit crunch and lead to a deep recession.

Let’s take a closer look at where major central banks currently stand in terms of their rate hikes:

United States

The Federal Reserve recently increased rates by 25 basis points, bringing them to a range of 5.25% to 5.5%. It was the 11th rate increase in the last 12 meetings. Fed Chair Jerome Powell indicated that more hikes could be on the horizon, but the market was unconvinced. Money market pricing implies that traders believe this might be the final hike of the cycle.

United States chart

New Zealand

Having raised its cash rate to a 14-year high of 5.5% in May, the Reserve Bank of New Zealand chose to hold it there in July. It is likely that this marked the end of the 20-month hiking cycle. Economists surveyed by Reuters expect the RBNZ to maintain the current interest rate for the remainder of 2023.

New Zealand chart

Britain

The Bank of England is set to meet on August 3. Expectations for a significant rate increase have eased after the latest data revealed that inflation fell to a softer-than-expected 7.9% in June. The Bank of England had previously raised rates by 50 basis points to 5% in June, the highest level since 2008. However, the easing inflationary pressure has reduced market bets on UK rates surpassing 6%.

Britain chart

Canada

The Bank of Canada raised rates to a 22-year high of 5% on July 12. Minutes from the meeting indicated that policymakers had considered delaying the rate increase but concluded that they could not take the risk of inflation rebounding. Canadian inflation fell to 2.8% in June, and the Bank of Canada does not anticipate it reaching the 2% target until mid-2025.

Canada chart

Euro Zone

The European Central Bank recently raised its deposit rate by 25 basis points to 3.75%, the highest level since 2000. While they have left room for additional increases to combat persistent inflation, the policy statement no longer provides a clear hint for further hikes. As a result, the next increase at the September meeting is no longer considered a certainty.

Euro Zone chart

Australia

Australia’s central bank decided to maintain its key rate at an 11-year high of 4.1% in July. A slowdown in inflation during the second quarter has eased the pressure for further increases. Market expectations for another rise in August stand at just one in four chances. Governor Philip Lowe’s upcoming penultimate meeting in September, before being replaced by Deputy Governor Michele Bullock, might bring further clarity on the rate trajectory.

Australia chart

Norway

Inflation in Norway reached a new record of 7% in June, suggesting that the tightening cycle is not yet over. The Norges Bank surprised the market with a 50 basis points increase to a 15-year high of 3.75% in June. Another hike is expected at the upcoming meeting in August.

Norway chart

Sweden

Despite a 20% drop in house prices since March 2022, Sweden’s Riksbank is expected to continue raising rates. Inflation cooled to 6.4% in June but remains significantly above its 2% target. Market expectations place an 80% chance of a 25 basis points hike in September, following a similar increase to 3.75% in June.

Sweden chart

Switzerland

Investors remain divided on whether the Swiss National Bank will raise interest rates again following a cooling inflation rate of 1.7% in June. The SNB raised rates to 1.75% from -0.75% in June last year. Current market sentiment suggests a 50% chance of a 25 basis points increase in September, with an equal probability of a hold decision.

Switzerland chart

Japan

The Bank of Japan, known as the world’s most dovish major central bank, recently concluded a two-day meeting. All eyes were on Governor Kazuo Ueda, waiting to see if he would finally tighten policy after 15 months of above-target inflation. However, the central bank appears to lean towards maintaining its dovish stance, signaling that it might not adjust policy at this time.

Japan chart

Central banks across the globe are facing a delicate balancing act as they decide whether to continue their aggressive rate hikes or pull back. The consequences of their decisions could have a significant impact on financial stability, inflation, and economic growth. With inflationary pressures cooling in certain economies, central banks must carefully navigate the path forward to ensure the best outcome for their respective countries.