More Signs Central Banks Will Ease – Pictet

Amanda Cheesley Deputy Editor 25 March 2024

More Signs Central Banks Will Ease – Pictet

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management shares his insights on the global easing cycle.

The Swiss National Bank was the first major central bank in developed markets to cut rates in this cycle, trimming borrowing costs last week. Although Japan and Turkey raised rates, Frederik Ducrozet at Pictet Wealth Management said he saw growing evidence that major central banks are on track to embark on a global easing cycle by the summer.

Ducrozet highlighted that most developed central banks unambiguously confirmed their easing bias last week. The Swiss National Bank (SNB) became the first to deliver a 25 basis point cut in this cycle, lowering it to 1.5 per cent. He and the market had expected the SNB to cut rates in June, although large downside surprises to consumer price index (CPI) inflation in January and February had raised the risk of an earlier move. In its monetary policy statement, the SNB argued that the decision to ease was made possible “because the fight against inflation over the past two and a half years has been effective.”

The biggest surprise came from the very large downward revisions to the SNB’s inflation forecasts, to the tune of around 50 bps. The medium-term inflation forecast point (to end-2026) was revised to 1.1 per cent, compared with 1.6 per cent three months ago, on the back of “lower second-round effects.” Ducrozet expects the SNB to cut policy rates again in June, to 1.25 per cent, with a risk of another move later this year.

Against trend, the Bank of Japan meanwhile hiked rates for the first time since 2007.

In Canada, the surprise decline in CPI inflation in February to 2.8 per cent (vs. a consensus expectation for a rise to 3.1 per cet) has fueled speculation of an earlier-than-expected rate cut from the Bank of Canada (BoC) from the current level of 5 per cent. The Reserve Bank of Australia (RBA) left its cash rate target unchanged at 4.35 per cent this week but dropped its tightening bias. The March statement noted that “the board is not ruling anything in or out,” consistent with a neutral stance. RBA governor Michele Bullock justified the communication change as a response to some data that made them “more confident about the path [they] we are on”.

Ducrozet expects the US Federal Reserve, the European Central Bank and the Bank of England to start cutting rates in June. More importantly, the debate has started over the pace and extent of the easing cycle, he said.

The US economy stands out as the outlier in terms of labor market resilience and stickier inflation, raising the risk that the Fed might not deliver the five cuts he forecast for this year. However, Ducrozet believes that a further normalization of inflation to an acceptable level of “two point something” would be enough for the Fed to start dialing back policy tightening in June.

Central bankers could now target a more neutral stance to avoid easing too much, risking a resurgence of inflation, he continued. But the neutral rate is an elusive concept and almost impossible to estimate in real time. Moreover, the new macro environment facing central banks will likely be characterized by the prominence of supply shocks as well as fiscal and geopolitical risks, resulting in greater uncertainty and macroeconomic volatility, he said. See more commentary on rates here. 

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