Have central banks around the world succeeded in curbing inflation?

Central banks around the world reached a pivot point this week, with Switzerland becoming the first major economy to cut interest rates and the Bank of Japan raising interest rates for the first time in 17 years. At the same time, markets are still trying to assess when most of the world’s most influential central banks will begin to ease the tight monetary policy stances they have adopted over the past two years in an attempt to tame high inflation.

Exceptional measures:

The Bank of Japan is an exceptional bank, having maintained negative interest rates for 17 years in order to stimulate a stagnant economy and boost inflation. This experiment, along with its unconventional policies of yield curve control and qualitative and quantitative easing, finally ended on Tuesday.

Japan expects a significant rise in wages following ongoing negotiations between unionized employees and Japan Corporation, which indicates the country’s highly centralized economic system. Bank of Japan policymakers expect these higher salaries to fuel domestic demand, thus increasing inflation. For his part, Tomoya Masanao, co-president of PIMCO Japan, said that the medium- and long-term effects of this shift could be more significant than what markets expect, and the main question is where Japanese inflation rates will stabilize after the pandemic.

“Although the Bank of Japan stressed its commitment to the 2% inflation target, it is unlikely, in our view, that the Bank of Japan will maintain its accommodative monetary policy indefinitely to achieve its 2% target,” Masanao said. Pointing out that, “The Bank of Japan’s policy adjustments in the medium term are likely to include reducing the balance sheet and raising interest rates.” Despite potential headwinds from the global economic slowdown and interest rate cuts by other major central banks, the Bank of Japan is preparing to reduce its unusually large balance sheet slowly but surely.

Sudden decision:

Swiss National Bank on Thursday surprised the market by cutting its key interest rate by 0.25 percentage points to 1.5%, saying inflation is likely to currently remain below 2% for the near future. Switzerland’s headline inflation rates and core CPI have remained below this level since June 2023 and May 2023, respectively, and the central bank revised down its forecast to 1.4% by the end of the year, then 1.2% in 2025 and 1.1% in 2026.

The SNB also cited the strength of the Swiss franc as having played a role in its decision to ease policy. “To the extent that inflation falls below 2%, continued currency strength poses a deflationary risk to the Swiss economy,” strategists at BCA Research said in a note on Friday. “Furthermore, the strength of the Swiss franc reduces the competitiveness of Swiss exports. This is especially true given that the Swiss Central Bank has highlighted weak global economic activity as the main risk.

American Policy:

The Federal Reserve on Wednesday held interest rates steady at a range of 5.25% to 5.5% as expected, and renewed its guidance for three 25 basis point rate cuts throughout this year.

The first cut is expected to come at the Fed’s June 11-12 meeting, according to CME Group’s FedWatch. Expectations for a cut remain despite expectations of strong growth, low unemployment, and slightly higher-than-expected core inflation, which has led to a slight increase in the central bank’s long-term interest rate forecasts. According to a recent CNBC report, the slight increase in long-term interest rate expectations is negligible. Whitney Watson, co-head of fixed income and liquidity solutions at Goldman Sachs, said: “It is negligible because market expectations are already much higher, but it is noteworthy because it reinforces the market’s recent perception that the interest rate cutting cycle may be less deep than initially expected.” “. However, it believes that despite “inflation challenges,” major central banks are on track to make cuts in the coming months.

Bank of England:

For its part, the Bank of England on Thursday kept interest rates steady at 5.25%, but gave a cautious signal, as the Monetary Policy Committee was divided over the measures, as two members withdrew their votes in favor of raising interest rates by another 25 basis points, which led to an 8-percent split. 1 in favor of installation. While one member voted in favor of the reduction. Governor Andrew Bailey also said the fundamentals were “moving in the right direction” for interest rate cuts, with headline UK inflation falling faster than expected, a slowing labor market and slower wage growth.

Deutsche Bank:

UK economist Sanjay Raja highlighted that interest rate cuts will still leave the bank rate in restrictive territory, but the changing rhetoric paves the way for the MPC to begin adjusting the level of restriction as inflation and wage pressures decline. According to the report, the indicators necessary to reduce interest rates are less clear. While the MPC noted that “more evidence of persistent inflation will be needed” to change its monetary policy stance, the meeting minutes also acknowledged that members disagreed “on the extent of evidence that is likely to be required” for the central bank to cut interest rates. “.

Deutsche Bank is sticking to its call for a cut at the bank’s next meeting on May 9, but given the question marks over the size and scope of the evidence required. However, futures on the market are pricing in only a 25% chance of this happening, with most economists split between June and August. Independence of banks: For its part, the International Monetary Fund warns of challenges currently facing central banks that affect their independence. There are increasing calls for lowering interest rates, even if premature, and they are likely to intensify with half the world’s population voting this year, pointing to the risks of political interference in decision-making in banks and appointments of officials, which he considers to be increasing. Stressing the need for governments and central banks to resist these pressures. Pointing to what independent central banks have achieved in recent years. Central banks were able to weather the pandemic effectively, unleashing aggressive monetary easing, which helped avert a global financial collapse and accelerated the recovery. As the focus shifted towards restoring price stability, central banks took the right step towards tightening monetary policies – albeit with a different time horizon. Its response has helped keep inflationary expectations steady in most countries even as prices have risen to levels not reached in several decades, according to the report.