Global policymakers are not allowing the US Federal Reserve's (Fed) delay in cutting interest rates to derail their own plans for monetary easing. Despite the Fed's cautious approach due to persistent US inflation, central banks around the world are moving forward with their strategies to lower borrowing costs. This article delves into the implications of the Fed's delay on global monetary policies and the broader economic landscape.
The Fed's Influence and Global Response
The Fed's delay in cutting interest rates has not significantly impacted the global easing trend. According to Bloomberg Economics, 23 of the world's top central banks, except for the Bank of Japan (BoJ), are expected to lower borrowing costs within the next 18 months. The aggregate benchmark global rate is projected to decrease by 155 basis points by the end of 2025.
Even though the Fed's plans for rate cuts were disrupted by stubborn US inflation, it is still anticipated to implement a couple of rate cuts this year. However, the global easing process is turning out to be less synchronized than initially expected, with different central banks moving at their own pace.
Central Banks' Actions
In Europe, the Swiss National Bank (SNB) has already cut rates twice this year, while the European Central Bank (ECB) has made one move. The Bank of England (BoE) has yet to act, and Norwegian officials have signaled that they are unlikely to make any changes before 2025. Meanwhile, Australia's central bank has not ruled out another rate hike.
Bloomberg Economics noted that post-pandemic inflation has disrupted the traditional central bank playbook, with rates rising swiftly and falling slowly. The Fed's influence as a global anchor appears diminished, with the ECB, SNB, and many emerging markets charting their own courses.
Fed's Future Moves
Fed officials have indicated that one rate cut is penciled in for this year, according to the median projection released in June. However, the timing remains uncertain, with possibilities ranging from the third quarter to the end of the year or even later. Policymakers have been cautious about the timing of easing, given the mixed signals from recent inflation data.
Fed Chairman Jerome Powell has emphasized that decisions will be based on a range of data, including labor market conditions and prices. Bloomberg Economics' Anna Wong predicts that the Fed will likely start easing in September, with cuts expected in both September and December, totaling 50 basis points this year and an additional 100 basis points in 2025.
European Central Bank's Approach
The ECB, having lowered rates in June for the first time since its series of hikes, is not in a rush to make further cuts. Inflation is gradually retreating but is not expected to sustainably hit the 2% target until near the end of 2025. Wage growth, especially in the services sector, is keeping consumer price gains elevated, making officials cautious about loosening monetary policy too quickly.
Bank of Japan's Strategy
The BoJ is set to unveil a plan for quantitative tightening, which could include reducing bond buying and possibly a rate hike. The weak yen has already impacted households and small businesses by increasing import costs, contributing to economic contractions in recent quarters.
