Central Bank Tracker: More Developed Market central banks are cutting rates

Insights for What’s Ahead

• In June, the pendulum of Developed Market monetary policy shifted slightly in the direction of interest rate cutters. After one interest rate cut in March (Swiss National Bank) and one in May (Sweden’s Riksbank), there were another three in June: the European Central Bank (ECB) and the Bank of Canada cut interest rates and the Swiss National Bank cut rates for a second time.
• However, most Developed Market central banks remained on hold. Seven central banks left monetary policy rates unchanged in June (see Figure 2: Hikers vs Cutters).
• The Conference Board GDP-weighted Developed Market monetary policy rate average is starting to move lower. The average across the twelve major Developed Market central banks The Conference Board tracks regularly, peaked in April at 4.26%. The five rate cuts so far this year reduced the average by thirteen basis points to 4.12% in June. This is the lowest rate since September 2023, yet still well above the 0.9% average of 2019, the last full year before the pandemic (see Figure 1: Developed Markets Policy Rates and Inflation).
• Persistence of above-target inflation is the main reason for central banks’ tight monetary policy regimes. During the rapid disinflationary phase between October 2022 and October 2023, the annual Developed Market inflation rate improved by 0.4 percentage point on average per month. Since then, the downward pace has slowed to an average of just 0.03 percentage point per month. In June, the Developed Market inflation average stood at 2.87% compared to 2.96% in November 2023 (see Figure 1: Developed Markets Policy Rates and Inflation).     
• Even among central banks that are cutting rates, many do not believe the inflation fight is over. Instead of engaging in sizable or rapid interest rate cuts, central banks seem to prefer fine-tuning the degree of monetary policy restrictiveness. The best evidence comes from ECB President Lagarde who stressed in the June post-meeting press conference that, “what we’re doing here [..] is removing a degree of restriction. We are moderating the level of restriction that applies”. Hence, the pace of Developed Market interest rate cuts is likely to remain glacial without further material slowing in inflation.

With the Fed and the ECB on pause, market focus is shifting toward the Bank of Japan, which is under pressure to raise interest rates again

July may be a quieter month for central bank watchers with only six policy meetings scheduled among the twelve banks we follow. Stil, observers will receive important updates on central bank policy stances and the direction of interest rates from the Federal Reserve (July 31), the ECB (July 18), and the Bank of Japan (July 31).

The Federal Reserve is not expected to change policy rates at their July meeting. A slight majority of FOMC participants downgraded the number of expected policy rate cuts in 2024 from three at the March FOMC meeting to just one at the June meeting. Importantly, Fed chair Powell stressed that the committee needs more confidence in the disinflationary trend to begin cutting interest rates. The Conference Board still forecasts two Fed interest rate cuts in 2024— at the November and December meetings (for more on the June FOMC meeting see: Fed reduces 2024 rate cut expectations).

The ECB delivered its first interest rate cut in June but simultaneously dampened expectations that the action was the beginning of a series of rate reductions. ECB President Lagarde stressed that more data will be necessary to confirm that inflation is on a path towards the bank’s 2% target. The June Euro Area CPI inflation estimate showed only minor improvement in headline inflation and no change in core inflation in the month. Hence, a follow-up rate cut in July appears highly unlikely.

The Bank of Japan (BoJ) is facing a serious policy dilemma. On the one hand, the weak domestic economy could justify more monetary policy easing. On the other hand, a rapidly depreciating currency could warrant additional monetary policy tightening. First-quarter real GDP growth contracted at an annualized rate of -2.9%, while the Japanese yen’s exchange rate against the US dollar broke above ¥160 for the first time in 38 years. Direct interventions in the currency market by the BoJ—selling US dollars and buying yen—have not halted the yen’s slide. Hence, pressure is mounting for the BoJ to raise interest rates again to narrow the spreads between the Fed’s monetary policy rates. Widening interest rate spreads are major divers of yen weakness.  

Other monetary policy meetings on the calendar this month include the Bank of Canada (July 24), the Bank of Korea (July 10), and the Reserve Bank of New Zealand (July 9).