In the middle of the January round of major central bank policy meetings, we can start making some preliminary conclusions.
In Asia, the Bank of Japan has once again left its policy stance unchanged, providing no indication that a change in policy stance is imminent. Clearly the Bank’s new governor Kazuo Ueda and its MPC would like to eventually exit from the extraordinary easing measures introduced in the last few years, including Quantitative and Qualitative Easing (QQE) and Yield Curve Control (YCC) and negative rates. But inflation, which had finally gone above target in 2022 as a result of the pandemic, the war in Ukraine and the energy crisis, still does not provide enough reassurances of being able to remain close to target on a sustainable basis in coming years.
In Europe, the European Central Bank has left its key policy rates unchanged, as well as its forward guidance and balance sheet policy. During its press conference President Lagarde said that the Governing Council found a consensus around the fact that it was “premature” to discuss rate cuts at this stage, when key figures around wage growth are not available yet. It may be premature to make public what its internal discussions are, but the reality is that the discussion has been ongoing for some time.
The two extreme positions here are represented by Mario Centeno, governor of the Central Bank of Portugal, who would likely be in favour of a rate cut already in March, but could wait until April. On the other side of the spectrum, there’s Robert Holzmann, Governor of the Austrian central bank, who thinks that policy rates should not be cut in 2024. The consensus of the GC is likely in the middle of these extremes; as Lagarde hinted recently, probably favouring a rate cut in the summer. The market still attributes around 70% probability of a first rate cut taking place in April. We believe that Q2 is the correct compromise, possibly in April, almost certainly by June.
The Bank of England will hold its policy meeting this week. It is likely to keep its stance unchanged in February, but will likely need to change its forward guidance to show that the next move will likely be a cut in interest rates and/or a tapering of its balance sheet reduction plans. The updated forecast of the latest Monetary Policy Report will provide assistance to this process.
Finishing this world tour in America, the US Federal Reserve will also keep its policy stance unchanged at the FOMC meeting this week. But with inflation now back in check, the FOMC will need to start to remove its still-existing tightening bias. This could occur with a signal on rates with a change in forward guidance, or with a tapering of the balance sheet reduction.
From these preliminary considerations, it is clear that the unchanged policy stances of the various central banks are hiding heated discussion over their next moves, which we expect to occur broadly speaking mostly in Q2 this year, as we also discussed in our recently-published global outlook.
