This month featured six monetary policy meetings among the group of 12 major Developed Market central banks that The Conference Board follows. All banks kept policy rates on hold. Almost all of them have explicitly or implicitly acknowledged that policy rates have peaked, and the focus is turning to timing and the pace of interest rate cuts. The one exception is the Bank of Japan, but even here expectations are growing that the bank could end its negative interest rate policy, which has been in place since 2016.

Insights for What’s Ahead

• Central banks contemplating interest rate cuts in 2024 bodes well for lower borrowing costs later this year and potentially faster GDP growth. However, enduring risk of stubborn inflation that may keep interest rates higher than pre-pandemic averages for longer remains.
• For many central banks the pace of slowing in inflation will affect the timing and extent of interest rate cuts. Additionally, the degree to which tight credit conditions weaken respective economies may also factor into when and how much rates fall this year.
• Against this backdrop, firms must continue to adequately incorporate inflation and interest rate risk into their operations, costs, and portfolios. We suggest three steps to identify, test, and then mitigate risks that high and potentially sustained interest rates present (see, Three Steps to Managing Risk in a High-Interest Rate Environment).

Central Bank Meeting Highlights

• The Federal Reserve is still presenting a hawkish stance as it is trying to push rate cut expectations to the middle of the year by stressing the need for "more good data". Apparently, the FOMC has confidence that inflation is slowing sustainably, but it wants "more confidence," which it will get by more of the same inflation, jobs, and growth data in the coming months. (For more commentary see, Fed holds rates steady, but says cuts are on the horizon)
• The Bank of Canada is focused on how long to maintain a restrictive policy stance but has not begun talking about cutting interest rates.
• The ECB also spent considerable time pushing back against rate cut expectations, even though the disinflation process has run much further in the Euro Area than in most other major Developed Market economies (annual CPI inflation was less than2% in eight of the 20 Euro Area member states in December), and the economy is much closer to a recession (0% average annualized GDP growth in the last 5 quarters).
• Norway's Norgesbank was the last of the 12 Developed Market central banks to raise rates, but the bank is now also firmly on hold and there is no talk about rate cuts. Norway is lagging in the disinflation process (4.8% CPI inflation in December). The policy statement still stressed that "inflation is markedly above target" and that "the policy rate will likely be kept at [the current] level for some time ahead".
• The Bank of Korea also left rates unchanged, but stressed inflation is still too high and the need to "maintain a restrictive policy stance for a sufficiently long period of time" for the bank to gain enough confidence that inflation is converging to target.
• Finally, the Bank of Japan remains on a different policy path. The bank never raised rates and continued with a negative interest rate policy despite the rise in inflation. And while other banks are deep in the Quantitative Tightening process, Japan is still engaging in Quantitative Easing. Although, the Bank of Japan has significantly tightened the way it conducts yield curve control. The monetary policy statement still stressed the commitment to keep easing "as long as it is necessary for maintaining [the inflation] target in a stable manner". However, Governor Ueda also said that "the certainty of achieving the BOJ’s projections has continued to gradually increase" fueling expectations of an interest rate hike in the spring.

Will Real Rates Predict Who Cuts First?

All major Developed Market central banks are on hold, but monetary conditions are very different across the 12 economies. The US continues to have the highest real rates, which is somewhat justified by the strong growth performance. US real rates are 340 basis points above the 2010-19 average, by far the largest deviation and one way of arguing the Fed has the tightest monetary policy stance among Developed Market economies. But the Euro Area has real rates that are not far below those in the US and are more than 250 basis points above their 2010-2019 average. This is likely too high given the weak economy, making the ECB a prime candidate for an early rate cut this year. 

Of course, Bank of Japan is an outlier at the other end with real rates still deeply negative and well below the previous cycle average. But the BOJ is not the only one in that camp. Meanwhile, Taiwan's CBC, New Zealand's RBNZ and Australia's RBA are three other banks with real rates still below their previous cycle average. Hence, this group of central banks may not be at the forefront of the coming rate-cut cycle.