With the first signs of dents in economic growth now visible, and fallout from financial-market tensions lingering, any pause by the Federal Reserve after at least one more increase in May could cement a turn in what has been the most aggressive global tightening cycle seen in decades.
The European Central Bank and regional counterparts might keep going longer and even aspire to keep restrictive settings in place, but a shift in gear for US monetary policy led by Chair Jerome Powell would be an important signal to global peers.
From Brazil to Indonesia, a pivot toward rate cuts could start as soon as this year, with many advanced-world officials not far behind. Overall, at least 20 of the 23 major jurisdictions monitored by Bloomberg are projected to be lowering borrowing costs in 2024.
The short-lived peak for global rates, according to a gauge calculated by Bloomberg Economics, will be 6% in the third quarter. By the end of next year, that measure is seen dropping to 4.9%.
As in previous cycles, Japan may stand out from the pack. Under newly installed Governor Kazuo Ueda, its rate — currently the lowest in the world — is anticipated to stay unchanged until next year, when an increase to zero is finally envisaged.
What Bloomberg Economics Says:
“Since the start of the year, central banks have been buffeted by rival forces. Faster China reopening, Europe dodging a downturn, and tight US labor markets all argue for higher rates. The collapse of Silicon Valley Bank and Credit Suisse pull in the opposite direction. So far, with limited signs of a broader banking crisis, it’s the arguments for tightening that are winning the day. Peak rates are in sight, but we’re not quite there yet.” —Tom Orlik, chief economistHere is Bloomberg’s quarterly guide to the world’s top central banks, covering 90% of the world economy.
GROUP OF SEVEN
U.S. Federal Reserve
- Current federal funds rate (upper bound): 5%
- Bloomberg Economics forecast for end of 2023: 5.25%
- Bloomberg Economics forecast for end of 2024: 4.25%
Fed officials look on track to keep raising rates despite recent bank strains, with higher oil prices likely hardening their resolve to hike at their meeting in early May.
While policymakers stress patience in assessing what the collapse of SVB means for the US economy, there’s not been much change in their rhetoric on the need to cool price pressures.
Officials forecast rates reaching 5.1% this year, implying another 25 basis-point increase from the Fed’s current benchmark target range of 4.75% to 5%.
That said, financial conditions have tightened following SVB’s failure and officials don’t rule out this helping to dampen the US economy, which could reduce the need for further hikes.
Investors predict rates will peak below 5%, with the Fed then cutting by roughly 50 basis points before end 2023.
What Bloomberg Economics Says:
“We expect the Fed will hike by another 25 basis points at its May meeting, when the upper bound of fed funds rates reaches 5.25%. With the recent production cuts by OPEC+ and still-tight US labor market, inflation will likely remain in the vicinity of 4% in 2023, and keep the Fed from rate cuts, as markets currently foresee. We see the Fed holding rates at the peak level for the duration of this year, even as a mild recession is likely to develop in late-2023.” —Anna Wong
European Central Bank
- Current deposit rate: 3%
- Bloomberg Economics forecast for end of 2023: 3.5%
- Bloomberg Economics forecast for end of 2024: 2.5%
ECB officials are increasingly flagging that their most aggressive period of rate rises may be nearing its conclusion. Some likely smaller hikes remain — to tackle underlying inflation that broke another record in March and will stay elevated. But with headline price gains heading firmly back toward the 2% target, the majority of the tightening — 350 basis points since last July — is complete.
Discussions on the end of the cycle follow recent ructions within the financial sector. Some policymakers reckon lenders may rein in credit as a result of that turbulence, a step that would weigh on economic growth and inflation. In the meantime, another front in the battle with prices has begun as the ECB allows an average of €15 billion ($15.8 billion) a month to roll off its balance sheet between March and June. A larger amount may be permitted beyond that.
What Bloomberg Economics Says:
“The ECB has a difficult balancing act. It has to deal with high inflation, a slowing economy and woes in the global banking sector. The Governing Council provided no guidance in March on its next move. If financial stability is preserved, Bloomberg Economics expects additional 25-bp hikes in May and June, taking the deposit rate to 3.50%. The risks are skewed toward another move of the same size in July. A long pause in restrictive territory (our estimate of neutral is 1.50% to 1.75%) is likely afterward.” —David Powell
Bank of Japan
- Current policy-rate balance: -0.1%
- Bloomberg Economics forecast for end of 2023: -0.1%
- Bloomberg Economics forecast for end of 2024: 0%
The Bank of Japan is now led by its first new Governor in a decade. This quarter will be key for setting the tone of Kazuo Ueda’s five-year term. So far he’s given strong hints of sticking with stimulus, but acute market focus is on if and when the veteran economics professor will make adjustments to the BOJ’s yield curve control.
That likely means every policy gathering this quarter will be live, especially after the bank hinted that any YCC change may have to come as a surprise. June is the most popular timing for a policy shift among BOJ watchers, but there is little doubt that Ueda will be under intense scrutiny at his first meeting later this month.
What Bloomberg Economics Says:
“It’s hard to see the BOJ changing course this year. Ueda may shift to a neutral bias in April. We doubt he will scrap YCC. Conditions for stable inflation around 2% aren’t there yet. The BOJ’s latest estimate showed the negative output gap widening in 4Q22 – hardly a favorable backdrop for paring stimulus. Looking into 2024, we see the BOJ raising the mid-point target for the 10-year JGB yield from 0% to 0.25% in 1Q24 and exiting its negative short-term rate in 2Q24.”
Bank of England
- Current bank rate: 4.25%
- Bloomberg Economics forecast for end of 2023: 4.25%
- Bloomberg Economics forecast for end of 2024: 3.5%
An unexpected jump in UK inflation has left economists and investors divided about whether the Bank of England will continue its quickest monetary tightening in three decades. Money markets anticipate one last quarter-point interest rate increase to 4.5% is more likely than not by the middle of the year, but economists are marginally tilted against any further change.
Policymakers led by Governor Andrew Bailey have avoided giving further guidance about their next decisions, noting conflicting forces buffeting the outlook. Inflation is expected to fall sharply along with energy prices, and turmoil surrounding the rescues of Credit Suisse and Silicon Valley Bank may raise the cost of funding for banks. But at the same time, the economy is performing better than anticipated, and expectations about rises in wages and prices have lingered persistently above the 2% target.
What Bloomberg Economics Says:
“Weakening pay growth and the imminent prospect of a sharp, energy-driven fall in headline inflation should be enough for the BOE to call time on its hiking cycle, with the policy rate at 4.25%. The central bank retains a tightening bias in view of positive data surprises, creating an upside risk to our forecast for a lengthy pause. We think the committee would need to see renewed strength in the jobs market, sticky pay growth and a loosening in credit conditions to nudge rates higher.” —Ana Andrade
Bank of Canada
- Current overnight lending rate: 4.5%
- Median economist forecast for end of 2023: 4.5%
- Median economist forecast for end of 2024: 3%
The Bank of Canada announced in January that it plans to hold rates steady at 4.5%, a conditional pause that’s dependent on inflation slowing to 3% by the middle of this year, and a return to the 2% target in 2024.
Before the recent deposit turmoil, swaps traders were betting hotter-than-expected economic data and a higher terminal rate outlook for the Federal Reserve would force Governor Tiff Macklem from the sidelines to tighten borrowing costs further. Now, a 25-basis-point cut is priced in by the end of 2023.
While most economists expect the country will enter a technical recession in the middle of the year, core inflation pressures are sticky, challenging Macklem’s calculus as he balances the impact of global financial risks against an economy that was supposed to have stalled by this point.
BRICS CENTRAL BANKS
People’s Bank of China
- Current 1-year medium-term lending rate: 2.75%
- Bloomberg Economics forecast for end of 2023: 2.55%
- Bloomberg Economics forecast for end of 2024: 2.45%
China’s economic recovery is picking up steam after Covid restrictions were abruptly dropped and the property market stabilizes, although the rebound is still fairly patchy and policymakers have no intention yet of scaling back monetary support. Instead of interest rates, though, the PBOC is using other policy tools, like the reserve requirement ratio — which it cut in March — to help spur lending and growth in the economy.
Governor Yi Gang, who was reappointed to his post in March, said recently that current rate levels are appropriate and the central bank won’t flood the system with stimulus. Economists expect inflation to remain fairly benign this year at just above 2%, giving officials scope to keep monetary policy relatively accommodative for now.
What Bloomberg Economics Says:
“The PBOC’s 25-bp cut to required reserve ratio at late March released around 500 billion yuan cash for banks to lend and support a recovery that’s facing headwinds from a global downturn and housing rout. It highlights an easing bias — we expect a 10-bp rate cut in 2Q and see the PBOC trimming the RRR and policy rates further in 2H23.” —David Qu
Reserve Bank of India
- Current RBI repurchase rate: 6.5%
- Bloomberg Economics forecast for end of 2023: 6.5%
- Bloomberg Economics forecast for end of 2024: 5.5%
The Reserve Bank of India joins a few central banks in the region — including Indonesia, South Korea and Malaysia — in pausing its yearlong tightening cycle. On April 6, the monetary authority stood pat on interest rates to evaluate the cumulative impact of 250 basis points hike in borrowing cost so far as growth cools and new challenges emerge for the global economy.
Governor Shaktikanta Das said the disinflation process would be “gradual and protracted” for Asia’s third largest economy, but added that the monetary authority will be “ready to act appropriately” if needed and its latest decision is a “pause, not a pivot.”
What Bloomberg Economics Says:
“The RBI’s decision to surprise the market with a rate-pause at its Apr. 6 review — in line with our call — signals a shift in focus toward supporting growth. The debate over the next few quarters should now shift to the timing of rate cuts, as the global cycle peaks and domestic disinflation starts to materialize. We see the RBI staying on hold for the rest of the year and starting to lower rates in 1Q24, bringing them down to 5.5% by 4Q24.” —Abhishek Gupta