Will 2024 really be a year for global central banks to cut interest rates? As the time officially enters the the Year of the Loong in the lunar calendar, people have been more and more uncertain about this prediction that they firmly believed in at the end of last year. At least, the possibility of countries opening the door to cut interest rates at the same time in a short time seems to be getting more and more slim, as the major global central banks stepped into the tightening cycle two years ago
There are indications that as the influence of domestic drivers determining price prospects gradually replaces global trends, the synchronicity of monetary policy in developed country central banks over the past four years is about to begin to crack.
Some central banks may even continue to raise interest rates in 2024
As a pioneer in setting inflation targets in the early 1990s, the Federal Reserve of New Zealand has a strong ability to set monetary policy trends. According to economists at ANZ Bank, the Federal Reserve may raise interest rates again as early as the end of February, and traders believe that New Zealand may once again break the consistency of monetary policies among major central banks around the world.
In addition, recently there has been an increasingly hawkish stance, along with New Zealand's neighboring Australia. Earlier this month, Reserve Bank of Australia Chairman Michele Bullock stated that "the possibility of further interest rate hikes cannot be ruled out," highlighting a policy path that is completely different from market expectations. The market had originally thought that the Fed would adopt a dovish tone at its first interest rate meeting of the year on February 6th.
In fact, even the Federal Reserve, which everyone expected to cut interest rates many times in 2024 at the end of last year, now seems to be facing new uncertainties at the arrival of the the Year of the Loong of the lunar calendar.
After the release of the two US blockbuster inflation reports, CPI and PPI, which far exceeded market expectations last week, the surge in employment growth, persistent stickiness of inflation and the overall economic performance of the US, which constantly contradicted pessimistic expectations, have pushed the yield of US treasury bond bonds back to the highest point in about two months, and traders have significantly lowered their expectations for interest rate cuts this year.
The current interest rate futures market in the United States estimates the end of this year's interest rates almost in line with the Federal Reserve's December chart - the median forecast from decision-makers corresponds to three rate cuts of 25 basis points each in 2024, and the current pricing of derivative contracts corresponds to the same magnitude, with only a small possibility of a fourth rate cut. You should know that at the end of last year, traders once bet on seven interest rate cuts this year.
Even more extreme is the call for interest rate hikes from several Wall Street investment banks and former US Treasury Secretary Summers last week. Last week, Kit Juckes, an analyst at Societe Generale, stated that the Federal Reserve "has no reason to be in a hurry" to cut interest rates. If the US economy accelerates again, the next interest rate decision by the Federal Reserve may be to raise rates rather than lower them.
Former US Treasury Secretary Summers also threatened in a recent interview that the next step for the Federal Reserve is likely to be to raise interest rates, rather than lower them. He believes that the Fed's actions must be "very careful".
Meanwhile, in the past few decades of efforts to overcome deflation, Japan, which has long been in a state of super easing, may take its first interest rate hike since 2007 in the coming months.
From the latest policy expectations of these central banks, it is indeed necessary to question whether 2024 is still a year of impressive interest rate cuts in the industry. At least in the first half of this year, the power of the "interest rate hike camp" is still fully capable of competing with the "interest rate cut camp"
Will the Global Central Bank embark on the road of divergence in the the Year of the Loong?
Of course, the easing path of some major global central banks this year may not be easily changed, such as in Europe, where the economy is currently on the brink of recession.
The eurozone only narrowly avoided an economic recession last year, and its price pressures fell faster than expected, which supports the views of industry insiders who are pushing for early interest rate cuts. Traders are also betting that the Swiss central bank will cut interest rates as early as next month. However, the UK is still in a dilemma of economic recession and high inflation, which may put the Bank of England in the most difficult situation.
The latest round of economic forecasts by the International Monetary Fund (IMF) highlights this divergence: the US economic outlook has improved, the eurozone economic outlook has deteriorated, and the UK economic data is bleak.
Bond traders currently expect that in one year, the benchmark interest rate in the United States will decrease by about 100 basis points, Europe will decrease by about 120 basis points, Australia will only be about 40 basis points lower than the current level, and Japan will raise interest rates by about 30 basis points.
Citigroup strategists say traders need to hedge against the risk of the Federal Reserve raising interest rates shortly after a very brief easing cycle.
This is a situation that major central banks around the world, including officials from the European Central Bank, are trying to avoid, as they are concerned that a rapid 180 degree turn may ultimately prove that they have underestimated inflation again.
In the past six months, policymakers around the world have spent a lot of time discussing the risks of taking action too early or too late. The former may be startled by the resurgence of price pressures, while the latter may excessively suppress demand. But currently, the latter is clearly gaining more support.
Pierre Olivier Gourinchas, Chief Economist of the IMF, said that central banks around the world should avoid premature easing, as it would cause a loss of hard-earned credibility and lead to a rebound in inflation; But we cannot excessively delay the interest rate cut to avoid endangering economic growth and putting the inflation rate at risk of falling below the target.
In a recent report, he wrote, "My feeling is that inflation seems to be more driven by demand in the United States, which needs to pay attention to the first type of risk mentioned above, while the eurozone, where soaring energy prices have played a disproportionate role in the inflation process, needs to manage the second type of risk more. In both cases, maintaining a soft landing path may not be easy."
In the long run, central banks in Europe, North America, and South Pacific countries must address vastly different structural issues, such as different population growth rates, energy import dependence, supply chain transfers, and housing dynamics. Therefore, the consistency of global monetary policy since the middle of 2020 (COVID-19 epidemic) will almost inevitably weaken.
Hoover Institution visiting scholar Mickey Levy said, "Central banks around the world will lower interest rates at different rates. Although inflation is decreasing in most places, central bank governors face different inflation and economic conditions, which determine the appropriate policy rates needed to achieve their goals."
Looking ahead to this week, the minutes of the January meetings of the Federal Reserve and the European Central Bank, which will be released on Wednesday and Thursday, are expected to receive close attention to understand the latest insights from officials within these two central banks on policy direction and pace.