Central Bank Tracker: The DM rate-cutting cycle picked up significant steam in September thanks to the first U.S. interest rate cut

Insights for What’s Ahead

• The Developed Market (DM) monetary policy shift gathered steam in September. Last month, the Bank of Canada, the European Central Bank (ECB), the Swiss National Bank, and Sweden’s Riksbank all lowered monetary policy rates, the first time five banks cut interest rates in the same month. Additionally, the Federal Reserve Board (Fed) cut interest rates to reduce the degree of restrictiveness in monetary policy. It took the total number of interest rate cuts by the major 12 DM central banks The Conference Board follows regularly to thirteen.

• The FOMC increased the number of rate-cutting central banks to seven. The Federal Reserve increased the ranks of rate-cutters to seven. The Fed was also the first central bank to cut interest rates by more than 25 basis points during the current DM cutting cylces. Outside the three Asian banks, Australia’s Royal Bank of Australia (RBA) and Norway’s Norgesbank are now the only DM central banks that are not among the rate cutters.   
• The DM monetary policy rate average moved down more convincingly last month. The (GDP-weighted) DM central bank monetary policy rate average declined by 28 basis points in September, the biggest one-month drop since March 2020. The cumulative decline stood at 38 basis points at the end of September.  

The Fed finally joined the group of rate-cutters with a half-point cut, the biggest by any major central bank so far

• The FOMC cut monetary policy rates by 50 basis points to 5.00%. It was the long-awaited start to the U.S. rate-cutting cycle. With that decision, the Fed offered something for everyone: a sizable interest rate cut for doomsayers and an upbeat assessment of the U.S. economy for those who are more optimistic (see ‘Threading the Needle’). Headline CPI inflation has fallen to 2.5%, and the Fed’s preferred inflation gauge, the PCE deflator, is down to 2.3%. U.S. real interest rates (using headline CPI) are still above 2%, even after the 50-basis-point cut. The Fed’s Summary of Economic Projections, which is an accumulation of 19 separate estimates by FOMC participants, suggests two more quarter-point interest rate cuts this year, four more in 2025, and the neutral monetary policy rate to be reached in 2026. The Conference Board anticipates 25bp cuts at each the November and December meetings and 125bp of cuts in 2025, leaving the fed funds rate target range at 3.00-3.25 percent by end-2025.    

• The ECB cut monetary policy rates by 25 basis points to 3.50% in September, the bank’s second interest rate cut in the last three meetings. Euro Area inflation has slowed to 2.2%, and economic conditions are deteriorating again. The preliminary August composite PMI index fell to 50.5, close to the 50 expansion/contraction threshold. Real interest rates at 1.3% are still well above the ECB’s most recent (January 2024 ECB Economic Bulletin) update of the Euro Area neutral rate. Yet, the ECB’s policy statement continued to emphasize that “domestic inflation remains high” and that to bring inflation back to target monetary policy rates will need to remain “sufficiently restrictive for as long as necessary to achieve this aim.”

• The Bank of Japan (BOJ) left monetary policy rates unchanged at 0.25%. The bank raised interest rates twice this year, in March and July. Both times, the decision was followed by a jump in market volatility that prompted the bank to pause between interest rate hikes. Japanese real monetary policy rates at -2.8% remain far below the 1.4% (GDP-weighted) DM average. The bank’s monetary policy statement had a slightly more cautious tone. It stated, "Japan's economy has recovered moderately, although some weakness has been seen in part.” In July, the underlying inflation forecast still showed the rate below the bank’s 2% target in 2024 and 2025, rising marginally above it only in 2026.   

• The Bank of England (BOE) left monetary policy rates unchanged at 5%. The Monetary Policy Committee’s decision was almost unanimous; only one member voted for another interest rate cut.  Headline inflation hit the bank’s 2% target during May but has started to re-accelerate. UK real monetary policy rates at 2.7% are still the highest across the major DM central banks, but only slightly higher than the Fed’s real rate. The monetary policy statement highlighted that the bank remains in a  cautious rate-cutting mode, stating that “a gradual approach to removing policy restraint remains appropriate.” UK monetary policy rates are on a downward trajectory, but the pace is slower than most of its rate-cutting peers.   

• The Swiss National Bank (SNB) cut monetary policy rates by 25 basis points to 1.00%. It was the bank’s third cut since the start of the rate-cutting cycle in March. Swiss real interest rates are back below 0% and not far from the -0.7% neutral real rate proxy. Inflation has fallen to 1.1%, prompting the bank to maintain a rate-cutting bias in its monetary policy statement: “Further cuts in the SNB monetary policy rate may become necessary in the coming quarters to ensure price stability over the medium term.” The SNB remains concerned about further disinflationary pressure from the recent appreciation of the Swiss franc.   

• Sweden’s Riksbank cut monetary policy rates by 25 basis points to 3.25%. It was the bank’s third cut since starting the rate-cutting cycle in May. Inflation has fallen to 1.2%, keeping Swedish real monetary policy rates at 2%. Low inflation is keeping the bank in rate-cutting mode. The statement hinted at more interest rate cuts: “If the outlook for inflation and economic activity remains unchanged, the policy rate may also be cut at the two remaining monetary policy meetings this year.” It also hinted at a possible acceleration in the pace of cuts: “A cut of 0.5 percentage points is possible at one of these meetings.”

• Norway’s Norgesbank left monetary policy rates unchanged at 4.50%. The bank has not joined the group of rate cutters. Norwegian inflation at 2.6% remains above the bank’s 2% target, and real interest rates at 1.9% remain well above neutral. The monetary policy statement shut the door on interest rate cuts this year: “the policy rate will likely be kept at 4.5 percent to the end of the year.” The Norgesbank remains concerned about rising business costs and the impact of this year’s currency depreciation. Wage growth is still above 6%, and the Norwegian Krone has been the weakest major DM currency (measured against the US dollar) this year. Monetary policy rate cuts will have to wait until 2025.

• The Bank of Canada (BOC) cut monetary policy rates by 25 basis points to 4.25%, the bank’s third since starting the rate-cutting cycle in June. Canadian inflation has fallen to the bank’s 2% target, and real interest rates at 2.3% are still among the highest across the major DM central banks. The monetary policy statement did not include any forward guidance. Yet, it acknowledged that inflation pressures are easing and continued to describe the economy as being in a “state of excess supply.” That suggests the bank will continue to remove policy restrictions and bring interest rates closer to neutral.

• The Reserve Bank of Australia (RBA) left monetary policy rates unchanged at 4.35%. Australia has not joined the group of rate cutters. Headline inflation at 2.6% is close to the bank’s 2.5% target. Yet, the RBA focuses on underlying inflation, which is still at 3.9%. The monetary policy statement maintained that the bank’s “current forecasts do not see inflation returning sustainably to target until 2026.” It seems unlikely the RBA will be cutting interest rates soon.       

• Finally, Taiwan’s Central Bank of China (CBC) left monetary policy rates unchanged at 2%. Taiwan does not have an official inflation target, but at 2.1%, the rate is close to what most DM central banks are aiming for. Taiwanese real interest rates at -0.1% are already as low as Switzerland’s, where inflation is already below target, suggesting there is no room for CBC to join the group of rate cutters any time soon. In addition to the monetary policy rate hold, CBC raised the reserve requirement, which indicated the bank is still leaning towards more tightening.          

The DM interest rate cutting cycle should continue in October

The October calendar looks lighter, with ‘only’ five central banks on the schedule. However, we might still see a further broadening of the DM interest rate-cutting cycle.

This month's meetings include the Reserve Bank of New Zealand (Oct 7), the Bank of Korea (Oct 10), the ECB (Oct 17), the Bank of Canada (Oct 23), and the Bank of Japan (Oct 31).

The ECB and the Bank of Canada are the most likely candidates to continue cutting interest rates this month, judging from their still-elevated level of real interest rates and their announced strategy of adjusting existing monetary policy restrictiveness.

The chances that the RBNZ will follow up with a second interest rate cut in October are more balanced. The bank started to reduce the level of monetary policy restraint in August. The monetary policy statement cited growing confidence that “annual consumer price inflation is returning to within the Monetary Policy Committee’s 1% to 3% target band.” However, inflation remained at 3% in the second quarter, and the RBNZ will not have the Q3 report available. Moreover, real policy rates at 1.9% are only marginally compared to regional peer Australia, where monetary policy remains on hold even though inflation is closer to target than is the case in New Zealand.

The Bank of Korea expressed concern about the weak won in recent meetings as one justification for staying on hold. However, the currency has reversed most losses against the US dollar from earlier this year. That could eventually prompt the bank to cut interest rates and reduce monetary policy restrictiveness, although the timing remains uncertain.  

Finally, the Bank of Japan is still in interest rate hiking mode despite the pause in September. Currency markets are less volatile, and the yen trended weaker in recent weeks. That might open the door for the BOJ to continue normalization of monetary policy rates. Inflation continued to move higher, reaching 3% in August, and at 0.25%, Japanese real rates remained well below the “maybe around 1.5% or maybe less than that” neutral monetary policy rate level BOJ Governor Kuroda recently mentioned.