The latest decisions and comments by central banks confirm that 2024 should see the start of monetary loosening in the major developed economies.
Listen to the article
With several central banks having held monetary policy meetings in recent days, the general tone has been clearly dovish.
At the US Federal Reserve (Fed), the Federal Open Market Committee (FOMC) held its policy rate steady on 20 March, for the fifth time in a row.
The day before, the Bank of Japan (BoJ) ended its negative rate policy and officially abandoned its yield curve control (YCC) policy while confirming that it would continue its asset purchase programme. Governor Kazuo Ueda gave no forward guidance.
The Reserve Bank of Australia kept its key rate unchanged, but removed the tightening bias from its post-meeting statement. The RBA sees the risks to inflation as being more balanced now.
The Bank of England (BoE) maintained its base rate at 5.25%. The two monetary policy committee members who had voted for a rate hike at the February meeting this time opted for the status quo. Governor Andrew Bailey said “we’re not yet at the point where we can cut interest rates, but things are moving in the right direction”.
On 21 March, the Swiss National Bank became the first G10 central bank in this cycle to cut its key rate, from 1.75% to 1.50%. The SNB said it had taken into account ‘the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year’.
With Swiss inflation at 1.2% year-on-year in February, the central bank revised down its forecast significantly, to 1.4% in 2024, 1.2% in 2025 and 1.1% in 2026 on average. In other words: Mission accomplished!
Several doves ready to take wing
The publication of higher-than-expected US inflation figures for January and March, illustrating the stickiness of services inflation, had led investors to expect a few months’ delay before rate cuts would begin.
Within a few weeks, the probability of seeing a first cut in the US federal funds target rate at the 30 April-1 May FOMC meeting fell from almost 100% to below 10%. The risk for financial markets was that one of the rate cuts expected in 2024 would be taken off the table.
From that perspective, the dovish tilt of recent policy meetings can be seen as good news. Even the European Central Bank (ECB) has joined the chorus – the number of Governing Council statements making clear that a cut will come in June has multiplied since early March.
Even so, and perhaps predictably, investors were only fully reassured after seeing the outcome of the Fed’s much-awaited FOMC meeting.
So, what about the Fed?
No rate cuts were expected on 20 March, but there were still some pre-meeting doubts over the message FOMC members would choose to relay via their growth, inflation, and policy rate forecasts.
With the sharp upward revision of its GDP growth forecast for the fourth quarter of 2024 from 1.4% to 2.1% year-on-year, and its forecast of 2.0% growth in 2025 and 2026 (above the consensus estimate of 1.8%), the FOMC seems to be confirming its scenario of a (very) soft-landing for the economy.
Furthermore, while its inflation forecast was revised up for the end of 2024 (from 2.4% to 2.6%), its forecast for 2025 and 2026 has not changed, implying that the Fed is not particularly concerned about the recent higher-than-expected inflation data. As Fed Chair Jerome Powell put it: ‘In and of itself, strong job growth is not a reason for us to be concerned about inflation.’
Such a comment supports the assumption that productivity gains can sustain solid growth without creating inflationary pressures.
Finally, the FOMC’s ‘dot plot’ – the chart that records each official’s projection for the key short-term interest rate – still points to three rate cuts in 2024; some observers had been concerned that this would fall to two. The slight increase in the level of rates deemed ‘appropriate’ in the long run shows that FOMC members believe the economy can withstand a somewhat higher equilibrium rate.
So, has Goldilocks moved to Washington? Let’s hope she has, because any further reversals in central bank rhetoric or in investors’ central scenario could have unpleasant consequences for financial markets.
Should inflation (again) exceed expectations in March, or if indicators show that the US economy is close to overheating, it could frighten the doves.
In China, the Vice President of the People’s Bank of China (PBoC) has just reminded us that Beijing has significant room for manoeuvre on monetary policy, particularly on the reserve requirement ratio (RRR). In January, similar comments preceded a 50bp cut in this policy rate, and the National People’s Congress (NPC) reassured investors in early March about the authorities’ willingness to support growth.
Wherever they come from, the doves should be welcomed by investors.
Disclaimer
This material is issued and has been prepared by a representative of BNP PARIBAS ASSET MANAGEMENT Australia Limited (“BNPP AMAU”) AFSL 223418 ABN 78 008 576 449.
This material is produced for information purposes only and does not constitute:
1. An offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
2. Investment advice.
Opinions included in this material constitute the judgement of BNPP AMAU at the time specified and may be subject to change without notice. BNPP AMAU is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.
Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material.
All information referred to in the present document is available on www.bnpparibas-am.com.
