The last Super Central Bank Week of the year! How will these central banks reduce market expectations for interest rate cuts?

This week, the world will usher in the last super central bank week of the year. Half of the economies with the largest trading currencies in the Group of 10 (G10), and the economies accounting for 60% of the global economy, will discuss interest rates in the next 60 hours.

The most eye-catching will be the Federal Reserve on Wednesday (13th), followed by the European Central Bank and the Bank of England on Thursday. Synchronized weakening in inflation data and some evidence of economic weakness have prompted markets to increase bets on interest rate cuts from these major central banks in the first half of 2024. This view conflicts with the signal that these central banks stated more than three months ago that they would maintain high interest rates for longer. Therefore, among major central banks, except for Norges Bank, which may increase borrowing costs, most central bank officials are facing pressure from the financial market, and their main tasks are how to reduce market expectations that the central bank is about to cut interest rates.

Joyce Chang, global research chairman at JPMorgan, said: "These central banks are expected to say that we are waiting to see whether the anti-inflation trend can continue." Therefore, JPMorgan believes that interest rates will be cut no earlier than the second half of next year.

In addition, this week several central banks including the Swiss National Bank, Norges Bank, Russian Central Bank, Brazilian Central Bank, Mexican Central Bank and Peruvian Central Bank will also announce their last interest rate decisions of the year. Most Latin American economies have now started an interest rate cutting cycle, and the central banks of Brazil and Peru are likely to cut interest rates again this week.

What would the Fed say?

The market generally expects that the Federal Reserve will suspend interest rate hikes for the third consecutive time this week and keep the federal funds rate at a 22-year high of 5.25% to 5.5%, as the lagging impact of a series of aggressive interest rate hikes since the beginning of 2022 still needs to be assessed. Although there is little suspense about suspending interest rate hikes again, what is more concerning is that Fed Chairman Powell will face a difficult communication challenge this week.

On the one hand, the current economic situation in the United States is complex. While the labor market is resilient and consumer spending is solid, there are real signs that economic growth is slowing and inflation will fall. Therefore, in order to maintain monetary policy flexibility, the Fed is not ready to communicate to the market that interest rates have reached a level that is "restrictive enough" to reduce inflation to the 2% target, so they are not ready to publicly discuss in more detail what they are doing. Under what circumstances will the Fed start cutting interest rates next year? But on the other hand, financial markets are not convinced by the Federal Reserve's warnings that it may tighten monetary policy further. Investors believe the U.S. economy has slowed to the point where further interest rate increases are not needed. At the same time, they are also betting that incoming data will force the Federal Reserve to cut interest rates sooner than expected.

This market expectation has also made U.S. financial conditions looser in recent weeks, threatening the Federal Reserve's policy goal of tightening financial conditions to a certain extent. Ellen Meade, who served as a senior adviser to the Federal Reserve Board of Directors until 2021 and now works at Duke University, said: "The Fed may believe that unless there are unexpected developments, they have completed this round of interest rate hikes, but in There are risks and costs in communicating with the market, so they have to temper the market's expectations for a rate cut. Regardless, this is a delicate moment because financial conditions are very important in the next direction of monetary policy."

The market expects that Powell will once again reiterate at this press conference that even if inflation continues to slow down, it is still "too early" to announce a policy shift. For every subsequent decision, the Fed will be very "cautious". Before that, the Fed will take the lead in releasing an interest rate decision and a series of economic forecasts, summarizing Fed officials' forecasts for interest rates, economic growth, unemployment and inflation.

Economists generally expect that the Fed's statement will remain unchanged and will still include an outline of the conditions the Fed will consider to identify "additional policies that may be appropriate to restore inflation to 2% over time." Because canceling this policy may send an overly direct signal to the market that the Fed has indeed completed its historic interest rate hike cycle. In addition, the September dot plot suggests that Federal Reserve officials predict that the federal funds rate will reach a peak of 5.5% to 5.75% this year and will fall by half a percentage point in 2024. Economists will also pay close attention to whether officials will raise their expectations this time. Forecast of interest rate cuts. Some economists believe that the Fed may increase the rate cut in 2024 by 25 percentage points given the slightly benign outlook for inflation.

Matthew Raskin, a former senior official at the New York Fed and now head of U.S. interest rate research at Deutsche Bank, said that maintaining the previous rate cut forecast will help convey to the market that "even if consumer price growth slows, the Fed is not prepared to A sudden policy shift". Any signals beyond this range could further complicate the Fed's monetary policy outlook. Deutsche Bank predicts that the Federal Reserve will start to cut interest rates from June next year, with a full-year rate cut of 1.75 percentage points. Economists at Morgan Stanley have the same forecast for the timing of a rate cut, but expect only a 1 percentage point cut throughout the year.

When will the European Central Bank and the Bank of England cut interest rates?

Similarly, investors have recently sharply increased their bets on the European Central Bank to cut interest rates next year, with German government bond yields falling more than 40 basis points in the past month after euro zone data showed lower-than-expected inflation and economic activity. Last week, even Isabel Schnabel, a well-known hawk and member of the European Central Bank's Executive Committee, turned "dovish", that is, she did not support further interest rate increases and said that the inflation rate had dropped "significantly." The market believed that this was a There are signs that interest rates could be cut sooner than expected.

The market is currently fully pricing in the European Central Bank's five interest rate cuts of 25 basis points each next year. The only difference is whether there will be a sixth rate cut. But just a month ago, the market was betting on just three rate cuts. Moreover, the probability of betting that the first interest rate cut will occur in March next year has also risen to 70%.

This is undoubtedly a rather extreme outlook, because although ECB policymakers are aware that the euro area is likely to fall into recession and admit that the labor market is showing signs of turning, they are not entirely convinced that the risk of inflation has passed. They want to see more wage data and are in no rush to act. Therefore, analysts expect that ECB President Lagarde may try to moderate market expectations for interest rate cuts. The core content includes giving new forecasts and expressing views on growth and inflation risks.

Orla Garvey, senior fixed income portfolio manager at Federated Hermes, said: "It would be easy for Lagarde to appear more hawkish on markets. We will be watching to see if or how she adjusts her longer-term, more... high rates’ discourse.”

Gordon Shannon, portfolio manager of asset management company TwentyFour, believes that Lagarde's "hawkish" statement may cause the market to give up its bets on interest rate cuts starting in March next year. "The European Central Bank may be a little more hawkish and make it clear that they need to continue to see evidence of slowing inflation after March next year." He said that in this case, "this means that an interest rate cut in March next year will become an impossible option."

The market also expects the Bank of England to keep interest rates unchanged for the third consecutive time and warned that the fight against inflation is far from over.

Like the United States and the Eurozone, the market expects the United Kingdom to face stagflation next year, and is betting that the Bank of England will start cutting interest rates in June next year. The current benchmark interest rate is at a 15-year high of 5.25%. However, BoE officials are also expected to reiterate their stance this time that policy needs to remain "restrictive" for "longer" to stem inflation while the labor market remains tight and price pressures in the services sector remain tight. Exceeded the 2% target.

Bloomberg economist Dan Hanson said, "We expect the Bank of England to double down on the situation because service sector inflation remains too high and there are early signs that the economy may have regained some momentum in the fourth quarter. There is still a long way to go to achieve 2% inflation, and monetary policy is likely to remain restrictive for a long time."

These central banks will also discuss interest rates

Among other central banks discussing interest rates this week, inflation in Switzerland is weaker than in the euro zone, falling well below the upper limit of the 2% target. But the market is betting that the Swiss National Bank may cut interest rates later than the European Central Bank, and the Swiss franc's exchange rate against the euro has risen to its highest level against the euro last week since the Swiss National Bank abandoned its exchange rate cap nearly nine years ago. Even so, market analysts believe that due to sluggish economic growth in Switzerland, central bank officials will need to consider the impact of borrowing costs on the economic outlook when they announce their latest interest rate decision on Thursday. Economists at UBS Group AG expect the Swiss National Bank to cut interest rates for the first time in June next year.

Norges Bank faces a tough choice this week on whether to raise interest rates for the final time by 25 basis points. Recent economic data may encourage bank officials to ignore the risk of potential crown weakness and stay on the sidelines as the economy cools. A recent key sentiment survey from the bank showed that the economy may stall this quarter and tighten in early 2024 as companies face more spare capacity and less hiring problems.

Meanwhile, the latest economic data from Norway has been weak again, with its fossil fuel industry easing some of the impact of high inflation and rising credit costs, but construction activity has fallen sharply and retail activity is also slowing.

Last week, the Russian Central Bank said that strong growth in prices and credit remained at previous levels, and inflation expectations remained high; it may take a period of tightening monetary policy to restore the inflation rate to the 4% target in 2024; residents' savings activities increased, some Loan demand is beginning to decline in some areas; the transition to slower price growth will take time; data shows economic growth slowed in the fourth quarter; and annual inflation will continue to increase in the coming months.

Based on this, Alexander Isakov, a Russian economist at Bloomberg, predicts that after raising the key interest rate by 200 basis points in October, the Bank of Russia may raise interest rates by another 100 basis points to 16% this Friday.

Previously, Russian Central Bank Governor Nabiullina said that further tightening of monetary policy may be necessary to curb inflation and push it back to 4% in 2024. If a sustained slowdown in inflation and inflation are not seen, In anticipation of signs of cooling, the Bank of Russia will prepare to raise interest rates again.

Unlike other central banks around the world, Latin American economies are the first to start an interest rate cutting cycle. This week, several Latin American central banks will discuss interest rates. On Wednesday local time, Brazil's central bank is expected to cut its benchmark interest rate by 50 basis points for the fourth consecutive time to 11.75%. Roberto Campos Neto, president of the bank, said at the end of November that the Brazilian central bank could continue to cut interest rates and uncertainty would be eliminated after the next two meetings. Economists generally expect that although Brazil's economic cooling and slowing inflation have reached the central bank's target range, the Brazilian central bank is expected to maintain interest rate cuts in the first quarter of 2024, but will slow down the pace of interest rate cuts.

The Central Bank of Peru may also cut interest rates by another 25 basis points this week. Peru's economy is currently issuing recession warnings and has been in deflation for several months, so the market expects the country's central bank to continue cutting interest rates to help get out of recession.

Mexico's central bank, which usually does not surprise with "dovish" policies, is expected to keep its key interest rate at a record high of 11.25% for the sixth consecutive time on Thursday. Minutes of the bank's November meeting showed that several central bank officials said the first rate cut could come in the first quarter of 2024. Mexico Central Bank Governor Victoria Rodriguez may also say this time that interest rate cut discussions will begin in early 2024.

Analysts generally expect that Mexico’s interest rate cutting cycle will begin in the first quarter of next year. William Jackson, chief emerging markets economist at Capital Economics, said: "Although policymakers at the Bank of Mexico have begun to talk about shifting to a monetary easing cycle, they are clearly still worried about strong wage pressures and core services inflation. The Bank of Mexico will be The last major central bank in the region to cut interest rates (in the first quarter of next year)."