Global central banks pause, markets predict rate cuts

Following an extended period of combating high inflation through historic monetary tightening, major central banks have temporarily halted their drive to raise interest rates, with traders anticipating swift rate reductions on the horizon. However, a few central banks in the last few days have alluded to the possible rate cut cycle to begin by the second half of the next fiscal.  On the other hand, a rate increase by Norway shocked the markets. Collectively, major rate setters have increased borrowing costs by 4,015 basis points during this cycle, with Japan being the lone exception, holding its dovish stance.

Rate Hikes Overview:

1) United States: The Fed's decision to maintain its key rate at 5.25 per cent to 5.5 per cent and the announcement of officials' unexpectedly dovish forecasts for 2024, projecting 75 basis points of cuts, infused optimism in markets. Powell signalled that a forthcoming period of aggressive tightening by the influential central bank was coming to an end, leading markets to anticipate a drop of around 150 bps by next December.

2) New Zealand: The Reserve Bank of New Zealand maintained its interest rate at a 15-year high of 5.5 per cent in November, revising its peak rate forecast to 5.69 per cent. Market expectations lean towards the cessation of hikes, with easing possibly as early as May.

3) Britain: The Bank of England's stance against market speculation on rate cuts kept its key rate at a 15-year high of 5.25 per cent. While this tempered rate cut predictions, markets still foresee over 100 bps of easing in the coming year.

4) Canada: In early December, the Bank of Canada retained its benchmark rate at a 22-year high of 5 per cent, leaving room for another hike due to improved financial conditions but remaining vigilant about inflation concerns.

5) Euro Zone: The ECB is anticipated to lead the charge in rate reductions next year as economic prospects dim. It kept its deposit rate stable at 4 per cent, signalling an early conclusion to its bond purchase scheme and concluding a decade-long initiative to acquire debt across the euro zone.

6)Norway: The Norges Bank raised its key rate by 25 bps to 4.50 per cent in a decision that surprised markets, adding it would likely stay put for some time from here. While core inflation in November at 5.8 per cent was below the central bank's 6.1per cent forecast, the Norwegian crown has traded consistently weaker than it expected, potentially stoking inflation.