Global Central Banks Diverge in Rate Decisions as Inflation Trends Vary

Following a period of global monetary tightening, central banks are starting to diverge in their approach to interest rates. While the US Federal Reserve remains cautious about cutting rates too soon, European rate setters are turning dovish. The Swiss National Bank recently cut rates by 25 basis points and is expected to lower them again in June. Sweden’s Riksbank also reduced rates and hinted at further cuts if inflation remains moderate. In contrast, the European Central Bank is anticipated to decrease rates in June as inflation nears its 2% target and economic activity slows down. However, some experts caution against a significant divergence from the Fed, as persistent US inflation may indicate similar trends across developed economies. Canadian inflation rose to 2.9%, and the Bank of Canada’s governor expressed confidence in declining price pressures, despite predictions of a June rate cut and expectations of lower borrowing costs by July. Meanwhile, the Bank of England maintained its base rate at 5.25% but suggested a rate cut might be necessary. While the Fed has kept rates unchanged since July 2022, it has allayed concerns that its subsequent steps would involve additional increases. The US stock market’s S&P 500 index recovered some of its April losses as some Fed officials indicated that rate reductions would ultimately materialize. Futures markets predict around 40 basis points of Fed cuts by September, whereas traders earlier predicted up to 150 basis points of decreases this year. Inflation in New Zealand is currently at 4%, surpassing the Reserve Bank of New Zealand’s target range of 1% to 3%. Investors anticipate rate cuts in October or November. The Reserve Bank of Australia left interest rates unchanged at 4.35% on Tuesday, and futures markets estimate a 20% probability of an increase in August. Norway’s central bank adjusted its position, becoming more hawkish, and stated that rates may remain steady for an extended period. Finally, the Bank of Japan stands apart by increasing rates out of negative territory in March, marking its first rise in 17 years. However, the move failed to narrow the significant difference between Japanese and US borrowing costs, causing the yen to plunge to new 34-year lows, necessitating administrative intervention to prop up the currency. BOJ Governor Kazuo Ueda heightened his hawkish tone, stating that the institution might intervene if the weak yen results in rising inflation.