Markets have been eagerly awaiting any indication of when central banks across developed economies will begin reducing interest rates. Derivative markets indicate that investors anticipate the first cuts to occur in June. Let’s delve deeper into the global interest rate scenario.
Naturally, we’ll begin with the largest economy in the world — the United States. Federal Reserve Chair Jerome Powell signaled on Wednesday that rate cuts are imminent this year, adhering to the Fed’s cautious approach of not rushing to lower rates before effectively managing inflation.
The Fed has raised interest rates to their highest levels in decades in an effort to bring inflation down to the central bank’s target of 2% annually. While significant progress has been made, prices remain stubborn, particularly for essentials like housing and groceries. Fed monetary policy decisions have influenced the national economy and currency — evident in the DXY chart.
A higher federal funds rate typically strengthens the national currency, as the elevated yields attract investment capital from foreign investors seeking higher returns on bonds and interest-rate products.
A stronger-than-anticipated start to 2024 for the economy has postponed the probable initiation of interest rate cuts, which were previously considered for this month but now appear more likely in May or June.
The European Central Bank has maintained its key interest rate at a record high, indicating that policymakers require more time to evaluate whether the recent series of interest rate hikes has sufficiently subdued inflation to warrant rate cuts.
With inflation in the region nearing the bank's 2% target, the ECB is weighing the risk of cutting rates prematurely, which could result in inflation remaining uncomfortably high, against the risk of delaying cuts unnecessarily, potentially harming an economy that has been struggling in recent months. The current expectations are leaning towards June for any rate adjustments.
Australia's economy, rich in commodities, continued to slow in the final months of 2023, raising concerns of a potential hard landing, particularly if the Reserve Bank of Australia follows through on its recent remarks suggesting further interest rate hikes are possible.
The Australian Bureau of Statistics reported on Wednesday that the economy grew by 0.2% sequentially in the fourth quarter and by 1.5% from a year earlier. Economists had projected GDP growth of approximately 0.2% for the quarter and 1.4% for the year.
While strong government spending and business investment supported the economy through the quarter, growth has been steadily declining as rising interest rates and escalating living expenses dampen consumer confidence. Alongside the slowdown, the unemployment rate has risen from a 50-year low of 3.4% in October 2022 to 4.1% in January of this year. The RBA predicts that unemployment will continue to rise throughout the year.
