Key Takeaways:
- Market expectations point to the Swiss National Bank (SNB) as the first among G10 central banks to cut rates.
- A considerable majority of analysts predict that the Bank of Japan (BOJ) will end its eight-year period of negative interest rates in April, along with its yield curve control policy.
Analysts are highlighting directional shifts for the Bank of Japan (BOJ) and the Swiss National Bank (SNB) in the next two months, but in different directions. The BOJ is expected to end its eight-year stretch of negative interest rates in April, along with its yield curve control policy.
On the other hand, the Swiss National Bank is anticipated to be the first G10 central bank to cut rates. Market expectations suggest around a 60% chance of a 25 basis point cut in March, potentially lowering the SNB’s key rate to 1.5%, according to LSEG data.
The U.S. Federal Reserve is expected to cut rates for the first time in June, with markets pricing in a 25 basis point reduction. However, minutes from the Fed’s January meeting reflect cautiousness about the pace of rate cuts, despite optimism regarding inflation trends.
The European Central Bank (ECB) is projected to begin cutting rates in June, as euro zone inflation eased to 2.8% in January while economic growth stagnates across the bloc.
The Bank of England (BoE) is expected to be among the last to start unwinding its tight monetary policy, with a majority of economists forecasting a first rate cut in August, according to a recent Reuters poll.
Goldman Sachs adjusted its rate cut projections from May to June, citing firmer inflation indicators. The firm suggests the Monetary Policy Committee will enact five 25 basis point cuts this year, potentially bringing the main Bank rate to 4% by December.
Swiss headline inflation declined sharply from 1.7% in December to 1.3% in January, a significant deviation from consensus forecasts. Similarly, core inflation dropped from 1.5% to 1.2%.
Analysts at Capital Economics interpret this steep decline as a signal that inflation is likely to fall below the Swiss National Bank’s (SNB) Q1 forecast of 1.8%. They anticipate this will prompt policymakers to cut the policy rate from 1.75% to 1.50% at the next SNB meeting in March.
However, there is still uncertainty leading up to the March 21 meeting. Economists at UBS maintain their stance that the SNB will commence rate cuts in June, followed by two more cuts in September and December, ultimately reaching a terminal rate of 1%.
UBS suggests that while the SNB may want to wait to ensure that domestic price pressures, particularly from higher rents, no longer pose inflation risks, the January inflation downside surprise indicates a need for reconsideration. The bank believes that for rate cuts to occur in March, the endpoint of the SNB’s inflation forecast would need to decline below 1.5%, down from the current 1.6%, and the forecast path would have to show a downward trajectory.
Bank of Japan to end negative rate era
Most major central banks are considering loosening monetary policy after a prolonged period of aggressive tightening to combat high inflation. However, for the Bank of Japan (BOJ), the situation is different.
According to Société Générale’s research note on Tuesday, the BOJ has all the necessary conditions to abandon its negative interest rate and yield curve control policies.
Since January 2016, the BOJ has maintained a short-term deposit rate of -0.1% as part of its efforts to stimulate the economy amid prolonged stagnation. A rate hike would mark Japan’s first in 16 years.
Japan’s core inflation rate, which excludes food and energy, reached 2% year-on-year in January after a third consecutive monthly increase. This slight upside surprise suggests that a sustained return to ultra-low inflation may not be on the horizon.
Kit Juckes, Société Générale’s global head of foreign exchange strategy, noted, “If inflation is expected to stabilize around 2% rather than revert to the 10-year average of just over 1%, there is no reason to postpone ending the negative interest rate and yield curve control policies.”
A significant majority of analysts anticipate the Bank of Japan (BOJ) to conclude its eight-year period of negative interest rates in April, alongside its yield curve control (YCC) policy.
Introduced last July, the BOJ’s YCC policy allows for flexibility, targeting a specific interest rate and adjusting bond purchases accordingly to maintain the yield on government bonds within the chosen target range.
Frédérique Carrier, head of investment strategy at RBC Wealth Management, highlighted the BOJ’s reluctance to halt its negative interest rate policy despite inflation surpassing the target. This hesitance stems from concerns about further destabilizing Japan’s already subdued economy.
Maintaining loose monetary policy weakens the yen, contributing to inflation. While other central banks might tighten policy in the face of prolonged inflation above the target, the BOJ proceeds cautiously due to lingering memories of deflation and the fragility of consumption, particularly given Japan’s aging population.
The weak yen benefits exporters but poses challenges for importers, driving inflation in Japan. However, according to Carrier, market expectations for a modest rate hike by June and a more significant increase by year-end are cautious enough to avoid disrupting the economy.
Carrier believes that as other central banks reduce rates, the interest rate gap with Japan will shrink, easing pressure on the yen and potentially providing relief for the economy.