On June 6, local time, the European Central Bank announced that it would cut all three major interest rates by 25 basis points, with the main refinancing rate, marginal lending rate and deposit mechanism rate being cut to 4.25%, 4.50% and 3.75% respectively. So far, many central banks including Switzerland, Sweden, Canada and Europe have started to cut interest rates, and the global central bank interest rate cut trend has accelerated. The market is very concerned about when the Federal Reserve will "take over".
The ECB said that based on the latest assessment of the inflation outlook, potential inflation dynamics and the strength of monetary policy transmission, after keeping interest rates stable for 9 months, it is now time to ease the degree of monetary policy restrictions. The ECB Governing Council will continue to follow a data-based, meeting-by-meeting approach to determine the appropriate level of restrictions and will not pre-commit to a specific interest rate path.
Interest rate cuts by central banks of major developed countries
From July 2022 to September 2023, the ECB raised interest rates by 450 basis points to curb high inflation, bringing eurozone inflation down from a record high of 10.6% to 2.6% in May 2024. At present, the inflation outlook has improved significantly and underlying inflation has also eased. The ECB expects that inflation may remain above the target for a long time next year and will maintain sufficient policy interest rate restrictions for as long as necessary. As many ECB officials have frequently released interest rate cut signals before, this rate cut has been fully priced in by the market.
After experiencing a cycle of aggressive interest rate hikes, the monetary policies of the central banks of major developed countries have gradually shifted. Based on the local inflation situation and economic prospects, many central banks have "preempted" the Federal Reserve and successively adopted interest rate cuts, making the background of "the year of interest rate cuts" even stronger.
Recently, the Bank of Canada announced a 25 basis point rate cut to 4.75%, completing the "first cut" among the G7 countries. Bank of Canada Governor Macklem said that there is continued evidence that core inflation is easing and monetary policy no longer needs to be too tight. If inflation continues to slow, it is reasonable to expect more rate cuts.
Before the European Central Bank and the Bank of Canada, the Swiss National Bank took the lead in firing the first shot of interest rate cuts among G10 countries in March, and the Swedish Central Bank also announced a rate cut in May. At the same time, more central banks are still choosing to wait and see.
The Fed’s Move
The market is paying close attention to when the Fed will take over and start the easing cycle. Currently, the Fed's rate cut expectations are still "running back and forth" amid data fluctuations. CME Fed tools show that the market expects the Fed to continue to "stand still" at the June and July interest rate meetings, and may cut interest rates for the first time in September.
Seth Carpenter, global chief economist of Morgan Stanley, said in his mid-year outlook that U.S. economic growth is still relatively strong. Due to the unexpected inflation data in the first quarter, the Federal Reserve is expected to delay the interest rate cut, which may start in September.
In summary, the monetary policies of the central banks of major developed countries are shifting from tightening to easing, and the interest rate cut by the European Central Bank has provided a clear signal to the market. As inflationary pressure eases, more countries may join the interest rate cut, and the decision of the Federal Reserve still needs to observe the performance of future economic data.
