The world reproduces the "Super Central Bank Week": Switzerland cuts interest rates, and the UK does not follow

The Economic Observer

2024-06-22 18:00Posted on the official account of Beijing Economic Observer

Economic Observer reporter Hu Yanming Will the UK become the next stop in this round of global "interest rate cuts"? Before June 20, this is a big suspense hanging over the global market.

Since 2024, the pace of growth and inflation has been uneven across economies around the world, and monetary policies have diverged across countries. In the week of June 17-21, the central banks of Australia, Norway, Switzerland, the United Kingdom and other countries held interest rate meetings, which became the "super central bank week" that attracted much attention.

The Federal Reserve Bank of Australia (RBA) announced on 18 June that it would keep its cash rate target unchanged at 4.35%. At around 15:30 Beijing time on June 20, the Swiss National Bank lowered the benchmark interest rate by 25 basis points to 1.25%, the second consecutive rate cut this year; At 16:00 Beijing time on June 20, Norges Bank announced that it would keep interest rates unchanged and hinted that it would not cut interest rates further; At 19:00 Beijing time on June 20, the Bank of England announced that it would keep the benchmark interest rate unchanged at 5.25%.

To descend or not to descend

On 20 June, the SNB cut its benchmark interest rate by 25 basis points to 1.25%, the second consecutive rate cut this year, following announcements from the Reserve Bank of Australia and Norges Bank to keep interest rates unchanged.

In March, the SNB surprised the market by announcing a 25 basis point interest rate cut, cutting its benchmark interest rate from 1.75% to 1.5%. This is the first rate cut since March 2022, after the SNB gradually raised interest rates to a ten-year high of 1.75%.

The SNB said on June 20 that underlying inflationary pressures in Switzerland fell again from the previous quarter. With the SNB cutting its policy rate, the SNB is able to maintain appropriate monetary conditions and will continue to closely monitor inflation developments and adjust monetary policy as necessary to ensure that inflation remains within a range consistent with prices over the medium term.

Switzerland has a low level of inflation compared to other countries. The announcement of the interest rate cut coincided with the SNB's announcement of a downward revision of inflation forecasts. Under the assumption of a policy rate of 1.25%, the SNB forecasts an average inflation rate of 1.3% in 2024, 1.1% in 2025 and 1% in 2026.

After the SNB cut interest rates for the second time, there was market view that the move showed a divergence between European policymakers and Fed policymakers. Therefore, the actions of the Bank of England are more closely watched by the market.

In June, the ECB started cutting interest rates and the Fed kept them unchanged, will the UK follow the ECB or the Fed?

On June 19, the day before the meeting, the UK released the consumer price index (CPI) and producer price index (PPI) for May. Data released by the Office for National Statistics showed that inflation in the UK was 2.0% in May, the first time in nearly three years, falling to the 2.0% target set by the Bank of England, down from 2.3% in April.

On 20 June, the Bank of England (BoE) announced that it would leave its benchmark interest rate unchanged at 5.25%. The Monetary Policy Committee voted by a majority of 7 to 2 to maintain the Bank Rate at 5.25%. Two members were in favour of cutting the bank rate by 0.25 percentage points to 5%.

As for the inflation rate, the Bank of England said that the 12-month inflation rate fell to 2.0% in May from 3.2% in March, close to the forecast of the May monetary policy report. Indicators of short-term inflation expectations also continued to be modest, especially for households. Inflation is expected to rise slightly in the second half of the year due to the base effect of energy prices last year.

The Bank of England called the decision not to cut interest rates a "finely balanced". The Bank of England's Monetary Policy Committee remains prepared to adjust monetary policy based on economic data to sustainably return inflation to its 2% target. As such, the BoE will continue to closely monitor ongoing inflationary pressures and signs of resilience across the economy, including a range of potential tightening measures for labour market conditions, wage growth and service price inflation.

A number of institutions believe that the UK may start to cut interest rates at the August interest rate meeting.

Differentiation or core themes

In March this year, the Swiss National Bank unexpectedly announced a 25 basis point interest rate cut, kicking off the current round of interest rate cuts by the European and American central banks. Especially since June, the pace of interest rate cuts in the world's major economies has accelerated.

On June 5, the Bank of Canada was the first to announce a 25bp cut in its benchmark interest rate to 4.75%, becoming the first G7 country to cut interest rates in the current global monetary cycle.

On 6 June, the European Central Bank (ECB) announced its first interest rate cut since 2019, cutting the three eurozone interest rates by 25 basis points, bringing the eurozone's main refinancing rate, marginal lending rate, and deposit facility rate to 4.25%, 4.5%, and 3.75%, respectively. This is the first time that the ECB has cut interest rates since it stopped raising interest rates in October last year, "preempting" the Fed.

Kristina Hooper, chief global market strategist at Invesco, believes that in the euro area, despite the tightening of monetary policy, the weak global economy, and the economic headwinds caused by many geopolitical factors, the economic momentum continues to improve. The eurozone labor market appears to have slowed, but real wage growth has improved as inflation has fallen significantly. With inflation approaching the central bank's target level, the ECB has initiated its first interest rate cut at its June meeting. The ECB may cut more rates in the future, but the pace is uncertain. These actions will help support future economic growth. Overall, the recent upside in the European growth outlook should allow growth to gradually return to trend levels for the rest of the year.

In contrast, the Fed remains "on the move." In June, Fed officials sharply lowered their expectations for the number of rate cuts this year. Fed Chair Jerome Powell said that the recent inflation data was more optimistic than earlier in the year and that more positive data is still needed to boost confidence.

As early as two days before the Bank of England announced its interest rate decision, Kristina Hooper said that the UK should behave similarly to the eurozone, but the timeline may be delayed and monetary policy will be less accommodative in the short term. Economic activity has improved recently, with forward-looking indicators all rising, reflecting a modest recovery. However, given that economic activity remains subdued, the Bank of England is expected to cut interest rates at least once by the end of the year, but high inflation remains a challenging factor and could limit further easing.

What is China's current monetary policy stance? On June 19, Pan Gongsheng, governor of the People's Bank of China, said at the 15th Lujiazui Forum that since the beginning of this year, global inflation has cooled down, but there is still strong stickiness. Some central banks, including the European Central Bank, have already started cutting interest rates, and some are still watching, expecting to cut rates later this year, but generally maintaining a high-rate, restrictive monetary policy stance. The situation in China is different, and the stance of monetary policy is supportive, providing financial support for the sustained economic recovery.

As for how global central banks weigh the risks when they start cutting interest rates, Kristina Hooper said that the market is currently presenting a relatively optimistic macro scenario. Expect volatility in the near term as markets react to changes in the outlook for interest rates, including any positive or unfavorable data that emerges along the way.

Kristina Hooper said that at this stage, the timing of rate cuts is more important than the exact number of rate cuts, especially when market sentiment is very volatile. There is also a significant risk that the market may be overly optimistic and the underlying problems have not yet been fully reflected. Divergence is likely to be a central theme for the rest of 2024, given that economies are likely to experience different growth in the future and inflation is likely to be different.

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