Ear to the Ground

22 March 2024

This week was one of central bank domination.  First up we had the Bank of Japan who, after eight years of negative rates, hiked their short term interest rate from -0.1% to a range of 0%-0.1%.  This move had been anticipated.  The use of the word hiked appears a little extreme, but it was the first rate increase we have seen in the country since 2007. 

Their actions did not stop there.  They also terminated their yield curve control policy, whereby they have been controlling the 10 year Japanese government bond yield through intervention in the market.  This was supplemented with comment however that if markets pushed long term yields higher quickly, it would be willing to intervene.  A shot across the bows to the market perhaps that they aren’t in lenient mode just yet. 

Finally, they also discontinued any purchases of exchange traded funds in Japanese equities.  Despite narrowing the yield gap with the US, there was little reaction in currency markets, with the Yen remaining near multi decade lows against the US dollar.

Catching the market unawares, however, was the Swiss National Bank.  They took the decision to move in the opposite direction, cutting their key interest rate by 0.25% to 1.5%.  This was in response to inflation falling to 1.2% in February.  The central bank believe that they have, for now at least, achieved inflation stability, with inflation having been within the 0-2% target range for the last nine consecutive months.  Is the Swiss National Bank the canary in the coal mine to indicate that interest rate cuts are on the way from other central banks in the not too distant future?

Next up was the US Federal Reserve.  As expected the decision was taken to maintain at the current range of 5.25%-5.50%.  The latest dot plot, which shows the expectations of voting committee members, shows a median expectation that interest rates will be at 4.50%-4.75% by the end of the year, thereby signalling three interest rate cuts in 2024.  Equity markets in particular reacted positively to the news.  At the same time, their projection for economic growth increased to 2.1% for 2024, a meaningful uplift from the previous projection of 1.4%.  One to watch was their forecast the Core Personal Consumption Expenditures price index, their preferred measure of inflation which, at 2.6%, is still above the 2% target.  Any uplift in inflationary could challenge the interest rate narrative.

Last but not least the Bank of England Monetary Policy Committee also met.  Here the base rate was also left on hold, at 5.25%, stating that they were still looking for clearer signals that inflationary pressures had subsided.  What was perhaps more interesting was the change in the voting pattern.  At the previous meeting two members had voted for an increase.  This time however eight members voted to pause, with only one dissenter who voted for a 0.25% rate cut.

Potentially helping them on the way to lower rates was the release of consumer price inflation for the 12 months to February.  This fell to 3.4% from the previous reading of 4% and below the market expectation of a 3.5%. 

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