From Washington to Frankfurt, then to London and multiple corners of the world, the bearers of global central banks are set to make their final interest rate decision this week in the spotlight
According to the schedule, over half of the G10 central banks will hold December interest rate meetings in the coming days, including the Federal Reserve in the early hours of Thursday and the European Central Bank and the Bank of England in the evening. From the perspective of monetary policy situations in various countries, except for a few central banks such as Norway that may still increase borrowing costs, most central bank officials will now face pressure from financial markets, and it needs to be explained why they seem less eager to shift towards loose monetary policy.
The synchronous weakening of global inflation data and some evidence of economic weakness have prompted investors to increase their bets on interest rate cuts by central banks in the first half of 2024. This viewpoint is clearly in conflict with the slogan of "maintaining higher interest rates for a longer period of time" proposed by the Federal Reserve and other major central banks more than three months ago.
In Latin America, which was the first to raise interest rates in this tightening cycle, many central banks have already initiated interest rate reduction cycles, and the central banks of Brazil and Peru may also lower interest rates this week. In contrast, the direction of interest rates in the United States and Europe remains less certain. After actively raising interest rates with new vitality at the beginning of this year, they are becoming even more hesitant by the end of 2023- which may lay the groundwork for a "long-term confrontation" with investors who are actively betting on dovish shifts.
JPMorgan Global Research Chairman Joyce Chang said in a media interview, "Central bank governors are actually saying, look, we are waiting to see if what we see in this anti inflation battle is sustainable. We believe that people will not see interest rate cuts start until the second half of next year."
The following are the core highlights of this super central bank week:
Federal Reserve: What will be sung at the final interest rate meeting in 2023?
This week is undoubtedly a crucial moment for investors trying to determine the direction of the Federal Reserve's interest rates next year: on Tuesday, the US Department of Labor will release November CPI data, and on Wednesday local time, the Federal Reserve will release its latest December interest rate resolution, which includes a rate chart that predicts how much interest rate cuts will be made next year.
At present, it is widely expected that the Federal Reserve will maintain its benchmark interest rate unchanged at its highest level in 20 years at its last interest rate meeting this year, as decision-makers are evaluating the lagging impact of a series of aggressive interest rate hikes since early 2022. Federal Reserve Chairman Powell had previously set a high threshold for further rate hikes, while traders in the interest rate market placed even further bets - almost completely ruling out the possibility of any future rate hikes.
Therefore, the biggest focus of this week's Federal Reserve decision will actually be when the Fed starts cutting interest rates, and how much it will cut next year - especially how many times FOMC members expect to cut interest rates in the next few years in the latest December chart. In the September grid chart, policymakers predicted that interest rates would remain at 5.1% by the end of 2024.
In contrast, the market has currently placed bets that the Federal Reserve will cut interest rates five times in 2024, with the earliest possible cut coming in May next year. The pricing of the interest rate market is almost 100 basis points different from the Federal Reserve's point chart, and there is a difference in the judgment of interest rates at the end of next year.
David Wilcox, a former senior economist at the Federal Reserve and currently working at the Peterson Institute for International Economics, said, "If the Federal Reserve were to cut interest rates now but then turn around and raise them later, it would be very difficult. At the same time, they need to be prepared to loosen policies when the evidence accumulates enough to prove that inflation is convincingly happening."
It is worth mentioning that last week's unexpected US non farm payroll data has slightly cooled the high expectations for interest rate cuts earlier this month. However, if this week's inflation data and the Federal Reserve's decision further release some hawkish signals that are not conducive to interest rate cuts next year, it may pose some resistance to the rebound of the year-end stock and bond market.
Renowned journalist Nick Timiraos, known as the "New Federal Reserve News Agency," said that the latest non farm payroll report means that the Federal Reserve will maintain interest rate stability at its December meeting, while also challenging the view that the Federal Reserve will quickly shift towards rate cuts next year. The November non farm payroll report may strengthen Federal Reserve Chairman Powell's latest statement that the Fed can currently maintain policy interest rates while observing how the previous series of aggressive rate hikes will slow economic activity and inflation.
The European Central Bank: Will it become the leader in next year's G10 central bank interest rate cuts?
The current situation of the European Central Bank is actually quite similar to that of the Federal Reserve - inflation data is also rapidly falling, and market expectations for the European Central Bank's interest rate cut next year continue to rise. However, given that the recession risk facing the European economy is much greater than that of the United States, traders have stronger expectations for the European Central Bank's interest rate cut next year - industry insiders have continued to believe that the European Central Bank may lead the G10 central bank's interest rate cut cycle in March or April next year.
In the past few months, the inflation rate in the eurozone has significantly decreased, and even dropped to the lowest point of 2.4% in over two years in November. Due to the increasing expectation of interest rate cuts, the euro has also been under considerable pressure - last week the euro fell below the 1.08 mark against the US dollar. Even policy makers at the European Central Bank were surprised by the speed of inflation decline, and as a result, the tone within the ECB's management committee has undergone a significant shift - the possibility of interest rate hikes has now been largely ruled out.
However, it is still not ruled out that European Central Bank President Lagarde may pour cold water on the sudden emergence of interest rate cuts this week
Although the eurozone is likely to fall into recession and policymakers acknowledge that the labor market is turning around, they are not entirely convinced that the danger of high inflation is over, and they still hope to see more salary data as evidence.
Isabel Schnabel, a member of the Executive Committee of the European Central Bank, stated last week that the slowdown in inflation so far has been "very significant" and it is unlikely to further raise interest rates now. But she is not so supportive of the interest rate cut prospects that traders are betting on. "We must see what happens, and we have been surprised in both directions multiple times. Therefore, we should be cautious when expressing our opinions on what will happen in six months," she said
Another European Central Bank official and Slovak Central Bank Governor Peter Kazimir pointed out that the expectation of interest rate cuts in the first quarter of 2024 is like a science fiction novel.
Economist David Powell said, "Given the risk of inflation prospects, the European Central Bank may be dissatisfied with the pricing of interest rate swaps for a rate cut in March. Lagarde may make this clear at a press conference. Our view remains that the first rate cut will be in June next year, but the risk leans towards early action."
Bank of England: Is the fight against inflation still far from over?
For the Bank of England, the good news from last month was that the inflation rate in October finally fell below 5.0%. However, compared to other major economies in Europe and America, this number is clearly still unbelievably high. Therefore, after the expected third consecutive meeting this month, the Bank of England is also likely to issue a warning that its fight against inflation is far from over.
Due to the stagnation of the UK economy next year, investors in the interest rate market are currently betting that the Bank of England will start cutting interest rates in June next year - the bank's interest rates are still at a 15 year high of 5.25%.
However, Bank of England officials are likely to reiterate their guidance that policies need to remain restrictive for an "extended" period of time to prevent inflation rates from consistently exceeding the target of 2%, given that the labor market remains tight and the service industry is facing price pressures.
The UK October GDP and industrial production data released this Wednesday will provide the latest insights into the economic situation, and Tuesday's UK employment report is also important as the slowdown in the labor market has not yet translated into a slowdown in hot wage growth.
Economists Dan Hanson and Ana Andrade said, "We expect the Bank of England to double emphasize that its policy may remain restrictive for an extended period of time based on high service sector inflation and preliminary signs that the economy may regain some momentum in the fourth quarter. There is still a long way to go to achieve a 2% inflation rate."
Foreign exchange broker XM Com pointed out that there is no expected change in interest rates at the Bank of England meeting on Thursday, but if Governor Bailey uses stronger language in his statement in an attempt to once again dispel interest rate cuts, the pound is unlikely to rise too much unless there is optimistic data or support from a weakening US dollar.
Other central banks: Major central banks welcome the "closing performance" of 2023
In addition to the three major central banks of the United States, Europe, and the United Kingdom, there are also many central banks around the world who will welcome their final interest rate meeting for 2023 this week.
The Swiss central bank will announce its interest rate decision this Thursday. At present, Switzerland's inflation rate is even lower than the neighboring eurozone - in fact, the country's inflation level is far below the central bank's target of 2%. However, the market is currently speculating that the Swiss central bank will not cut interest rates as quickly as the European Central Bank, and the Swiss franc to euro exchange rate has recently risen to its highest level since the Swiss central bank lifted the Swiss franc exchange rate cap nine years ago.
The Norwegian central bank will face a difficult decision this week on whether to raise interest rates for the last time by 25 basis points. Recent data may encourage officials to remain calm during economic downturns. A key sentiment survey conducted by the Norwegian central bank last week showed that the economy is expected to stagnate this quarter and shrink in early 2024 due to companies encountering more idle production capacity and fewer recruitment issues. At the same time, although Norway's fossil fuel industry has to some extent alleviated the impact of stubborn high inflation and rising credit costs, construction activities are still sharply declining and retail activities are also slowing down.
On the Russian side, economist Alexander Isakov stated that after raising key interest rates by 200 basis points in October, the Russian central bank may need to raise rates by another 100 basis points to 16% this Friday as policymakers are working hard to push the country's inflation rate back to its target of 4%.
The Latin American region will also see multiple central banks discussing interest rates this week. On Wednesday local time, under the leadership of Governor Roberto Campos Neto, the Brazilian central bank is expected to cut interest rates by 50 basis points for the fourth consecutive time, to 11.75%. At the same time, it is widely expected that economic cooling and inflation falling within the central bank's target range will enable the Brazilian central bank to continue this pace in the first quarter of 2024.
The Mexican central bank usually does not adopt a dovish policy unexpectedly, and is expected to unanimously decide on Thursday to maintain key interest rates at a record high level of 11.25% for the sixth consecutive meeting. Looking ahead, Mexican Bank Governor Victoria Rodriguez may indicate that discussions on interest rate cuts will begin in early 2024. Analysts have previously unanimously agreed that the bank's easing cycle will begin in the first quarter.
The Peruvian central bank may cut interest rates by another 25 basis points this week. The Peruvian economy is currently issuing a recession warning and has been trapped in deflation for several consecutive months. The monetary authorities of this Andean mountain country are expected to continue reducing borrowing costs to help overcome the economic recession.