The Bank of England concluded the April-May cycle of major central bank meetings last week, confirming that a new phase is about to begin. Already in March, the Swiss National Bank (SNB) was the first to cut rates in developed markets in this cycle, from 1.75% to 1.5%. Last week the Swedish Riksbank followed the SNB, cutting its repo rate from 4.0% to 3.75%.
As we discussed in our review, the Bank of England has already opened the door to a cut in its Bank Rate in June, although such a move cannot yet be considered a done deal. As governor Bailey said, it’s neither a “fait accompli”, nor an event that can be “ruled out.” A key issue will be the inflation and labour market data of the next two months; two full sets of data will be available before the 20th of June, with the second inflation release being scheduled for May 19th, the day before the MPC meeting. In May, the April CPI inflation figures will show a large drop from the current 3.2% due to base effects, but the May figure released in June may show an upward surprise that could convince the MPC to wait until August before announcing the first rate cut of this cycle. Additionally, Bailey may want to achieve a larger consensus and prefer to wait six more weeks rather than push through the MPC a decision with a razor-thin majority.
Also in Europe, as we discussed in our recent review, the ECB is considering its first 25bps rate cut a fait accompli, and it is clear that all the discussion within the Governing Council (CG) at the moment is about the Bank’s next moves. The doves within the GC would prefer to cut rates at every meeting until December, to bring the deposit rate to 2.75%.
On the other hand, the hawks would rather reduce the number of rate cuts to a minimum, perhaps to only two by the end of the year. As usual, a compromise will be reached, and three cuts by the end of the year are likely warranted. Data will tell if there is space for an additional rate cut in the next seven months.
On the other side of the pond, the US Federal Reserve has instead made clear that this is still no time to start cutting rates. The domestic economy in the US is still too strong, in spite of its recent deceleration, and its labour market too is robust (in spite of the recent relative softening) to begin an easing phase. We are now looking at the second half of the year to see the Fed start to cut rates, which it may do twice before the end of the year. On the other hand, we believe that the view that foresees the Fed hiking rates, instead of cutting them, is unfounded.
Finally, finishing our tour of the major central banks with a jump to the other side of the Pacific, the Bank of Japan is in a totally different phase compared to those of Europe or North America. After having ended its negative deposit rate facility and its Yield Curve Control policy, it is now in its tightening phase. The market would have expected more action from the Bank to have taken place since March, but instead the BoJ has remained prudent about its next moves; it is still unconvinced about the sustainability of inflation above the 2% target over the medium term. This has caused the Yen to depreciate further since the policy action took place, forcing the Ministry of Finance to supposedl) intervene in the market, so far unsuccessfully. Only a real change in tack in the policy stance (relative to the Fed’s) could convince market participants that the Yen will not depreciate further.
