The World’s Central Banks Reverse Interest Rate Policies

The global landscape of central banks’ policies has taken a significant turn. Switzerland has become the first major economy to cut interest rates, while the Bank of Japan has raised rates for the first time in 17 years.

The Shift in Central Bank Policies

The financial markets are eagerly anticipating when the majority of global central banks will begin loosening the tight monetary policies they have implemented over the past two years to curb rising inflation.

Bank of Japan (BOJ)
Japan has been an exception, maintaining negative interest rates for 17 years to stimulate the stagnant economy and drive inflation. However, this experiment, along with unique yield-curve control policies, has come to an end this week.

The BOJ’s policymakers expect that higher wages resulting from the spring wage negotiations will boost domestic demand and, in turn, push inflation higher. However, Tomoya Masanao, co-head of Pimco Japan, cautions that the long and medium-term impacts of these changes could be more profound than the market anticipates. The key question is how Japan’s inflation rate will be maintained after the Covid-19 pandemic.

Swiss National Bank (SNB)
In a surprising move, the Swiss National Bank reduced interest rates by 0.25 percentage points to 1.5%, citing expectations that inflation will stay below 2% in the near future. The SNB forecasts inflation to reach 1.4% by the end of 2024, 1.2% in 2025, and 1.1% in 2026. The strength of the Swiss franc is one of the reasons behind this decision to loosen monetary policy.

Federal Reserve (FED)
The US Federal Reserve decided to keep interest rates stable at 5.25%-5.5% and projected three rate cuts in 2024, each by 25 basis points. Market expectations suggest that the first rate cut, with a probability of up to 70%, will occur in the Fed’s meeting on June 11-12.

Despite higher growth forecasts, lower unemployment rates, and slightly higher core inflation than expected, the expectation for rate cuts remains.

Bank of England (BoE)
The Bank of England held interest rates steady at 5.25%, the highest level in 16 years, dismissing predictions of a rate cut this time as inflation remains high but has decreased.

BoE Governor Andrew Bailey emphasized that the UK economy has not reached the threshold for rate cuts, but everything is proceeding as planned.

What Lies Ahead?

This has been an important week for the global financial markets as everyone is cautious, evaluating future developments.

Regarding Japan, experts believe that the long-term impact of the positive interest rate policy that the country has initiated could be far-reaching. It could affect everything from mortgage rates to US government financing. Japan holds the largest foreign holdings of US Treasury securities. Additionally, the country is a major lender abroad and a strong exporter.

If interest rates rise, it could also impact borrowing costs for private banks, affecting the capital raising abilities of small and medium-sized companies in Japan. Furthermore, an increase in the value of the Yen due to higher long-term interest rates would have implications for Japan’s export businesses.

On the other hand, the US presidential election in November will have significant ramifications. CNBC reported that Donald Trump has publicly declared that if re-elected, he will impose additional tariffs on Chinese goods, potentially at a rate of 60% or higher.

“Such a move could increase inflation in the US, forcing the Fed to raise interest rates again. It will also have some impact on the Japanese economy,” said Keiji Kanda, a senior economist at the Daiwa Institute of Research.

As for the UK, the country’s economy slipped into technical recession in Q4 2023 and experienced two years of stagnation. Therefore, the central bank is trying to strike a balance between bringing inflation back to 2% and avoiding prolonged economic downturn.

This week has marked a turning point in the global financial markets. As central banks around the world reverse their interest rate policies, the impact on the global economy remains uncertain. Only time will tell how these changes will unfold.

This article was written by a financial expert for Business Today.