2023-09-22 17:01:57
Have central banks finished raising rates to stem inflation? Uncertainty remains but monetary institutions agree to postpone the prospect of the first cuts until the distant future. The American Federal Reserve (Fed) has thus this week, as hoped by the markets, maintained its rates at their current level (range of 5.25 to 5.5%).
A decision which might give hope that the yield curve has reached a peak, before they go back down. But the Fed created a surprise by announcing that a new increase would take place before the end of 2023. It also specified, to the great dismay of investors, that rates should then fall less quickly than expected (they are now expected at 5.1 % in 2024, compared to 4.6% previously).
The reason given? The American economy is doing better than expected – the Fed has doubled its growth forecast for 2023 – raising fears that inflation will pick up once more if rates fall too quickly. The Fed thus adopted a firmer line than expected. A position shared by other central banks, such as that of Norway: its rate increase on Thursday was anticipated, but it also warned that a new turn of the screw was “likely” in December, and ruled out a priori easing of the next year.
Growth or inflation
This firm tone “surprised the markets”, which had “decided that the peak” of rate increases “is taking place at the moment”, deciphers for AFP Fabio Balboni, economist at HSBC, even if “the communication from central banks leaves the door open to the possibility of increasing them further.” This is linked, according to him, to “real uncertainty regarding the level of inflation next year”. And their decision “reflects a trade-off between growth and inflation”. Rate increases actually increase the cost of credit for businesses and consumers. Theoretically, this reduces demand, and therefore inflationary pressures. But if demand slows too much, we run the risk of a recession.
Faced with this dilemma, the European Central Bank (ECB) finally decided in favor of the option limiting inflation and carried out a tenth consecutive rate increase, bringing its reference interest rate to 4%, a higher since 1999. “We cannot say that we have reached the peak,” said its president Christine Lagarde. ECB officials, however, signaled that its cycle of monetary tightening was coming to an end, without completely closing the door to a further increase if the situation required it. Above all, they also warned that rates would be maintained at their current high level “for a sufficiently long period”.
Rate cut at the end of 2024?
However, there are some signs that central banks have reached the peak of their monetary tightening. The Bank of England (BoE) has already taken an unexpected turn on Thursday by announcing a first pause since December 2021, following a slight decline on Tuesday in British inflation in August. This decision was not accompanied by a speech as firm as that of the Fed.
Switzerland and Japan have also chosen not to increase their rates, with the Japanese institution even reaffirming on Friday that it would not hesitate to take new monetary easing measures if necessary. In total, half of the central banks have chosen over the last ten days to press the pause button. “We expect that there will be no more rate increases in the future” for the Fed, the ECB and the BoE, says Fabio Balboni.
Jennifer McKeown, of Capital Economics, sees “final increases” occurring in the fourth quarter. Then, “as 2024 approaches, the cycle of relaxation will set in,” she believes. But then, when will rates finally fall? “This time next year, we expect 21 of the 30 major central banks to cut interest rates,” Ms. McKeown wrote in a note.
Mr. Balboni is more cautious: “In this context of weak growth, it will be very complicated to reduce rates while inflation” remains “too high”. According to him, the first reduction will take place in the United States, “in the third quarter of 2024”. For the rest of the world, we will have to wait until 2025.
Have central banks finished raising rates to stem inflation? Uncertainty remains but monetary institutions agree to postpone the prospect of the first declines until the distant future. The American Federal Reserve (Fed) thus this week, as hoped by the markets, maintained its rates at their current level…
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