This week has resulted in a greater degree of certainty that interest rates are going to be cut in major economies.  

The Swiss National Bank cut rates by 25bps, whilst the Fed stuck to its guns on three cuts this year in spite of some ‘bumps in the road’. Even the Bank of England hawks – Haskell and Mann – threw in the towel and the MPC is seen likely cutting in the summer. And after the SNB cut, we may see the ECB move sooner. 

It’s tacit acceptance that higher for longer is about inflation, not interest rates. The message this week from the CBs is clear – we are going to accept higher inflation as the price for keeping the economy going, keeping jobs and paying for all this debt to finance ‘domestic bliss and foreign wars’. This is now doctrine – as I have long been saying they would need to tacitly, then ultimately explicitly, accept higher inflation. 

And why shouldn’t they? Suppressing yields and pushing up inflation has been their stated aim for well over a decade. Now they have it and want to keep it – hiking interest rates into the oblivion of unemployment and recession was never the plan. Moreover, higher inflation and suppressed yields is positive for the debt burden. And there is a feeling that maybe the effect of monetary policy is not what it once was – maybe pushing up rates did little to combat transitory forces like energy price spikes; so cuts won’t really make a lot of difference.  

Monetary policy does still have a big impact for financial markets, of course. Equity markets have raced to fresh record highs this week after the Federal Reserve signalled it’s not worried about sticky core inflation and still plans to cut three times this year. Even this, it should be noted, represents far fewer cuts than the market had anticipated at the start of the year. Its ability to digest such a change in rates futures is indicative of the bullishness, and the fact that an awful lot of money has been printed and will still be printed. Central banks are keen to top up the punchbowl; if the last mile on inflation is so hard, why tire yourself out needlessly?  

Horses for courses: Switzerland is in a different place to the UK, for instance. Swiss inflation fell to 1.3% in Jan and 1.2% in Feb, plus the SNB was uncomfortable with CHF strength. But it’s interesting now because we may start to see a multi-speed exit from restrictive policy stances. Central banks are starting to need to think for themselves again and take things in the direction that best suits their economy. 

Meanwhile the Bank of Japan moved in the other direction, tentatively. The BoJ pledged to maintain the purchase of long-term government bonds and keep conditions accommodative for a while longer, saying it “will continue its JGB purchases with broadly the same amount as before” and increase them “in case of a rapid rise in long-term interest rates”. JPY was offered and the resulting yen weakness prompted some jawboning about doing more, temporarily nudging USDJPY off its multi-year highs. The yen carry trade may not be over but it’s certainly a dynamic situation.  

It’s getting interesting again – throw in a few elections this year and FX volatility may be returning. 

Reference:

USD/CHF surges to near 0.8960 after SNB announced a 25 bps interest rate cut (fxstreet.com)

Monetary policy assessment of 21 March 2024 (snb.ch)

Bank of Japan ends negative interest rate policy – Asia News NetworkAsia News Network

https://www.reuters.com/markets/rates-bonds/investors-tweak-bets-ecb-rate-cuts-dovish-side-after-fed-snb-2024-03-21/ 

https://www.investing.com/news/forex-news/asia-fx-sinks-as-dollar-surges-to-3week-high-after-snb-rate-cut-3349197 

Neil Wilson

Chief Market Analyst at Finalto

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