Interest rate cuts from major central banks are gathering pace as economies worldwide grapple with slowing growth and subdued inflation. As of this week, half of the ten major developed market central banks have started easing monetary policies, with the U.S. Federal Reserve expected to follow suit shortly. Amid ongoing challenges such as stubborn inflation, weak economic performance, and a delicate balancing act between supporting growth and curbing inflation, central banks are taking decisive actions to adjust their policy rates.

Here’s a breakdown of the recent actions and upcoming expectations for the central banks overseeing the world’s most traded currencies, and how their monetary strategies are shaping the global financial landscape.

1. Switzerland: Prioritizing Export Stability Amid Deflationary Pressures*

The Swiss National Bank (SNB) has been proactive in its approach to monetary easing. It was the first among its Western peers to lower borrowing costs in March 2024, followed by another cut in June, bringing rates down to 1.25%. Outgoing SNB Chair Thomas Jordan has emphasized that a strong Swiss franc poses a threat to the country’s exports, particularly as inflation fell to just 1.1% in August. Futures markets now fully anticipate another rate cut on September 26, with some speculating about a 50 basis point (bps) move.

Jordan’s strategy reflects Switzerland’s unique challenges in balancing domestic economic growth with its heavy reliance on exports. As inflation drops, the SNB is expected to continue prioritizing export competitiveness by keeping rates low.

2. Canada: Slowing Economy Spurs More Cuts

The Bank of Canada (BoC) has also been aggressive in its rate-cutting cycle, implementing its third consecutive rate reduction in early September, bringing rates down to 4.25%. A further 25 bps cut is anticipated in October, as Canada’s economy faces significant headwinds. Strong population growth has led to a rise in unemployment, which now sits at 6.6%. Additionally, the BoC has expressed concerns that inflation could undershoot its 2% target.

This context places the Canadian economy in a precarious position, and with the BoC likely to ease further, the focus will remain on balancing employment challenges with inflationary pressures.

3. Sweden: Easing as Inflation Steadies

Sweden’s Riksbank initiated rate cuts in May after an extended period of monetary tightening designed to bring inflation under control. While those rate hikes successfully curbed inflation, they also weakened the economy. As of now, Swedish interest rates stand at 3.5%, and annual inflation has fallen below the Riksbank’s 2% target.

Swedish policymakers are expected to continue easing, with a 25 bps cut likely on September 25. The Riksbank’s strategy mirrors those of other central banks, balancing inflationary control with the need to support a faltering economy.

4. Eurozone: Uncertainty Persists Amid Weak Economic Growth

The European Central Bank (ECB) delivered its second rate cut of the year this Thursday as eurozone inflation slows and the economy struggles. Despite the cut, ECB policymakers provided few signals about future actions, leaving markets to speculate. As things stand, money markets are pricing in an additional 40 bps of cuts by year-end, with a roughly 42% chance of a further 25 bps cut in October.

The ECB faces a unique set of challenges, with the eurozone experiencing tepid economic growth coupled with cooling inflation. While investors expect further easing, uncertainty looms over the ECB’s next steps.

5. United Kingdom: Gradual Easing Amid Stubborn Inflation

The Bank of England (BoE) is also expected to ease further, albeit more gradually than its peers. The BoE implemented its first rate cut in August, reducing benchmark borrowing costs to 5%. However, services inflation in the UK remains stubborn, suggesting that the BoE may ease more cautiously than the ECB or the U.S. Federal Reserve.

Markets predict one more quarter-point cut in 2024, likely in November, as the BoE contends with sticky inflation and the need to support economic growth.

6. United States: A Historic Cut on the Horizon

All eyes are on the U.S. Federal Reserve as it prepares for its September 18 meeting, where it is widely expected to deliver the first U.S. rate cut since 2020. Market sentiment favors a 25 bps reduction, though some speculate a 50 bps cut may be possible. Policymaker comments suggest a cut is imminent, though the Fed has avoided framing the decision as a response to an impending recession.

Traders are pricing in approximately 100 bps of easing by the end of the year, although economists surveyed by Reuters expect a more conservative 75 bps. The upcoming decision will likely set the tone for the Fed’s monetary policy over the coming months as it navigates slowing growth and persistent inflation.

7. New Zealand: Early Cuts in a Struggling Economy

The Reserve Bank of New Zealand (RBNZ) has moved faster than expected in cutting rates, implementing its first cut of the cycle in August, well ahead of its previous projections. Interest rates now sit at 5.25%, and markets expect a further 25 bps cut in October.

New Zealand’s unique economic structure, characterized by quarterly rather than monthly GDP and inflation data releases, has baffled both the central bank and market participants. Nevertheless, the RBNZ has acted to support an economy showing signs of strain, with further cuts likely on the horizon.

8. Norway: Delayed Easing Amid High Inflation

Norway’s central bank remains in the hawkish camp, keeping interest rates at a 16-year high of 4.5%. Despite this, markets expect the first rate cut to come in December, marking a later start to Norway’s easing cycle compared to other central banks.

Norwegian inflation remains above the central bank’s 2% target, necessitating a tighter monetary stance for the time being. However, as inflationary pressures ease, the Norges Bank is expected to join its peers in rate-cutting by year’s end.

9. Australia: No Cuts Expected Until Year-End

The Reserve Bank of Australia (RBA) has held rates steady at 4.35% since November 2023. Inflation remains elevated, though data suggests the Australian economy is beginning to struggle. As a result, markets do not expect the RBA to cut rates until December, with only a 50% chance of a rate reduction by then.

Australia’s monetary policy remains in a holding pattern, as the central bank assesses incoming data and waits for clearer signals from the economy.

10. Japan: The Outlier in Global Monetary Policy

While most central banks are moving toward easing, the Bank of Japan (BoJ) has raised interest rates twice this year, catching markets off guard. Japan’s inflation has been rising, prompting the BoJ to take a more aggressive stance. However, the rate hikes have led to volatile markets, including a sell-off in Japanese stocks and a surge in the yen.

Despite these market challenges, the BoJ is expected to leave rates unchanged at its upcoming meeting, with further hikes likely by year’s end as inflationary pressures continue to rise.

A Delicate Balancing Act for Global Central Banks

As central banks across the world navigate a rapidly changing economic landscape, the task of balancing inflation control with supporting economic growth has never been more challenging. Rate cuts are becoming more common as central banks attempt to stave off recession and maintain stability in the face of sluggish economic activity.

With the U.S. Federal Reserve expected to join the rate-cutting trend soon, the global monetary landscape is set to shift further. However, the varied approaches of different central banks—ranging from Switzerland’s aggressive cuts to Norway’s delayed easing—highlight the complexities of managing monetary policy in uncertain times.

(Adapted from Reuters.com)

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