Global Interest Rate Decisions: A Week of Central Bank Action (or Inaction)

Still, this week promises to be interesting for global monetary policy, as traders and investors will be looking for clues on when interest rates might be going down.

As expected in our previous article, the Swiss National Bank (SNB) and the Bank of Japan (BoJ) were the first central banks to decide to make a major change to their monetary policy trajectory.

In a historic move on March 19th, 2024, the Bank of Japan (BOJ) bid farewell to the world’s only negative interest rate policy. This marked a significant turning point for the Japanese economy, signifying an end to the eight-year experiment with negative rates. For the first time since 2007, the BOJ raised its target interest rate range to 0-0.1%, up from the previous -0.1%.

This decision reflects growing confidence in Japan’s economic outlook. For decades, the country had been grappling with deflation, a persistent decline in prices that discourages spending and investment. The BOJ’s negative rate policy, implemented in 2016, aimed to stimulate borrowing and economic activity. However, with recent signs of inflation returning, the central bank deemed it necessary to normalise monetary policy.

In a move that surprised global markets, the Swiss National Bank (SNB) became the first major central bank among the G10 to initiate an easing cycle on March 21st, 2024. They defied expectations by cutting interest rates by 25 basis points, bringing them down to 1.50%. This marked a historic shift, as it was the first time the SNB had lowered rates in nine years.

The SNB’s decision reflected a change in their monetary policy stance. In its monetary policy statement, they indicated that their efforts to combat inflation over the past few years had been successful.

Now, the SNB forecast predicts annual inflation of 1.4% for 2024, gradually declining to 1.2% in 2025 and 1.1% in 2026. This projection is based on the assumption that the Swiss National Bank (SNB) maintains its policy rate at 1.5% over the entire forecast horizon.

The success in bringing back inflation towards a more reasonable level (around 2%), combined with potential concerns about slowing economic growth, likely influenced the central bank members’ vote to reduce borrowing costs.

Three key monetary policy meetings are scheduled this week.

On Wednesday, the spotlight will be on the Reserve Bank of New Zealand (RBNZ) (not forgetting the release of the much-anticipated Federal Open Market Committee (FOMC) minutes). Then, on Thursday, all eyes will be on the Bank of Canada (BoC) and the European Central Bank (ECB) as they announce their latest interest rate decisions.

RBNZ’s Decision on its Official Cash Rate – Wednesday April 10th at 02:00 AM GMT

Globally, economists expect the Reserve Bank of New Zealand to maintain the current interest rate of 5.50% during their upcoming meeting. However, the bigger question is when rate cuts might be coming after a series of hikes in recent years. Since October 2021, the RBNZ has raised interest rates significantly, from 0.25% to 5.50%.

While this aimed to curb inflation that is now heading towards the central bank’s target between 1% and 3%, it has also pushed the country into recession twice in the past 18 months, with the latest GDP figures showing a contraction in the December 2023 quarter (-0.1% compared to the September quarter 2023 according to Stats NZ).

The RBNZ initially projected rate cuts wouldn’t begin until 2025. However, some local banks like ASB Bank, Bank of New Zealand, and Kiwibank believe cuts could come sooner, possibly in the fourth quarter of 2024. Reuters polls also suggest a potential decrease of 50 basis points to 5% by year-end.

If the RBNZ were to maintain higher interest rates compared to other central banks that are just starting (or likely to start) their tightening cycles, it could lead to a stronger New Zealand Dollar (NZD). This phenomenon hinges on the concept of interest rate differentials, which is the main force behind currency pair movements.

Imagine investors around the world are looking to park their money in different currencies. They’ll naturally gravitate towards currencies offering higher interest rates. Higher interest rates translate to potentially greater returns on investments in the given currency.

So, if the NZD offers a significantly higher interest rate than other currencies, it becomes more attractive to foreign investors.

When foreign investors buy NZDs to invest in New Zealand assets, it creates increased demand for the currency. This surge in demand, relative to the supply of NZDs, pushes the exchange rate upwards, essentially strengthening the NZD.

BoC’s Decision on its Overnight Rate – Thursday April 11th at 02:30 PM GMT

The Bank of Canada (BoC) is expected to maintain its current interest rate of 5% this time around. While inflation remains a concern, recent comments from BoC officials have hinted at the possibility of future rate cuts, sparking investor optimism.

Recent inflation figures also offer some encouraging signs. The Consumer Price Index (CPI) rose 2.8% in February 2024 compared to the same period last year, a slight decline from January 2024.

Financial services firm ING believes the BoC might be preparing for a rate cut as early as June. Investors will be closely analysing the bank’s statement and press conference for any dovish (signalling potential rate cuts) or hawkish (signalling potential high rates for longer) signals.

The bank also highlights the close relationship between Canadian monetary policy and that of the United States. Since the two economies are heavily intertwined, the BoC’s decisions often follow similar trends set by the US Federal Reserve. This can have implications for the Canadian Dollar (CAD), also known as the loonie. ING also expects the CAD to lag other commodity currencies.

These types of currencies are currencies of countries that heavily rely on exporting raw materials like oil, gold, or copper. The value of these currencies can therefore be influenced by global commodity prices. For example, if the price of oil rises, it can lead to a stronger CAD because Canada is a major oil exporter. The Australian Dollar (AUD) is another well-known commodity currency.

ECB’s Decision on its Main Refinancing Rate – Thursday April 11th at 12:15 PM GMT

The European Central Bank (ECB) voted to maintain its key interest rates at record highs during its March meeting, unchanged since September 2023. This decision reflects a cautious balancing act by policymakers, who are grappling with the threat of a recession alongside stubbornly high inflation, while being sure they stay restrictive enough to fight inflation over time.

The ECB kept the main refinancing operations rate at 4.5%, the highest level in 22 years. Similarly, the deposit facility rate and the marginal lending facility rate remained unchanged at 4% and 4.75%, respectively. However, despite these high rates, there are signs that a shift could be coming soon.

First, the ECB projections have revised inflation forecasts downwards. They now anticipate inflation to average 2.3% in 2024, down from their previous December forecast of 2.7%. This downward trend continues into 2025 and 2026 with projected rates of 2.0% and 1.9%, respectively. Additionally, Eurostat data for March 2024 revealed a drop in annual consumer price inflation to 2.4%, lower than the expected 2.6% and marking a four-month low.

This decline in inflation has fueled market optimism. Many market participants now anticipate the ECB will implement multiple rate cuts throughout 2024, with some predicting as many as four cuts by the end of the year. And the first of these potential cuts could come as early as June…

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