• Funds Blog
• March 23, 2025

Cautious Rate Cut Cycle Underway in Developed Economies

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The recent Jackson Hole Economic Policy Symposium has sparked a wave of anticipation surrounding interest rate cuts among developed economiesAs expectations intensify, the distinct paths and magnitude of these cuts, as well as the variations in real interest rates, have become focal points for analysts and economists alikeThe discourse has shifted, reflecting a paradigm where the urgency for easing monetary policies is increasingly viewed as a necessity rather than a precaution.

In March, the Swiss National Bank initiated a trend towards interest rate cuts, signaling the beginning of a systematic shift in the monetary stance of leading central banksThe Jackson Hole meeting, a significant annual gathering, not only served as an informative platform for the future trajectory of monetary policy but was also branded almost like a workshop on “anti-inflationary” measures among developed economies

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Central bankers rolled out their narratives of "success" in combating inflation, showcasing the resolve embedded in their monetary strategies while managing the pandemic’s economic fallout and regional geopolitical tensions.

Frederick Powell, the chairperson of the Federal Reserve, emerged as a central figure at this year’s symposium, articulating a dual message of a dovish yet cautious stanceIn his remarks, he underlined a noticeable drop in core inflation rates coupled with a cooling labor market, which collectively signal readiness for potential rate cutsWhile this portrayal resonated with market expectations, Powell’s underlying assertions—prompted by previous hesitations in forthcoming interest rate decisions—warranted deeper examination.

Leading into the symposium, market participants largely anticipated a 50 basis point cut in September, fueled by what has been termed “recession trading” logic

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However, Powell made it clear that the timing and scale of any cuts would depend on forthcoming data and evolving economic conditionsThe tone of his commentary suggested that the recent labor market softness is not necessarily indicative of impending recession; rather, it might reflect an increase in labor supply and a deceleration from previous hiring surgesThis view underscores the Fed’s confidence in sustaining a robust labor market while pursuing its dual mandate of stable prices and maximal employment.

Powell also emphasized that current policy rates afford the Federal Reserve the leeway to address any future economic challenges, including potential worsening conditions in the labor marketThus, financial institutions have begun to frame the anticipated September rate cut as “defensive” or “preventive.” Within this context, any trades hinging upon aggressive rate cuts and a rapid pace of easing carry salient risks, compelling investors to tread cautiously in their expectations.

On the other side of the Atlantic, Andrew Bailey, the Governor of the Bank of England, spent a significant portion of his address delineating the rationale behind a gradual monetary policy

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This explanation seemed partly aimed at justifying the differing opinions expressed within the Monetary Policy Committee regarding cuts in early AugustWhile the Bank of England acknowledges some self-correction in inflation and employment data, concerns regarding the re-emergence of inflationary pressures have schooled their stance towards a judicious reduction of borrowing costsThe slower-to-recede inflation forecasts hint that the Bank of England’s cut trajectory may lag behind that of the Federal Reserve and the European Central Bank.

Diving into the Eurozone, Philip Lane, the Chief Economist of the European Central Bank (ECB), outlined the delicate balance being pursued between potential rate cuts and ongoing efforts to curb inflationHis assessments indicate that while the ECB's monetary policy strategies are steering inflation back towards target levels, celebrating any premature victories could jeopardize future stability

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Given current projections, it is expected that Eurozone inflation may only stabilize around the 2% target by the end of 2025. Thus, despite recent cuts in June, maintaining a restrictive monetary policy remains crucial moving forward.

In tandem, the sentiments of caution and measured optimism permeated the discussions among the central banks of other developed nations, solidifying a global trendThe Swiss National Bank, the Sveriges Riksbank (Swedish central bank), and the Bank of Canada have been among the few to openly commit to further easing measuresSwitzerland and Sweden have recently reported inflation rates dipping below the 2% target threshold, with Switzerland witnessing a notable decline to 1.3%. Similarly, Canada’s consumer price index (CPI) marked its lowest annual rate in 40 months at 2.5% for July, suggesting shifting dynamics that support easing from its central bank.

In Sweden, the Riksbank signaled a commitment to a faster pace of cuts if inflation expectations stabilize, hinting at a methodological yet proactive approach

Meanwhile, the Bank of Canada, under Governor Tiff Macklem, acknowledged a transformative shift from an anti-inflation focus towards stabilizing economic growth, looking ahead to potential cuts in SeptemberIn stark contrast, the Reserve Bank of New Zealand and the Bank of Korea have exhibited a more gradual approach to easingThe RBNZ’s considerations for future cuts hinge on the stability of inflation projections, while the Bank of Korea remains focused on navigating rising economic headwinds amidst a cautiously tight monetary stance.

Contrasted with the strategies employed by other nations, the Reserve Bank of Australia and Norges Bank (Norwegian central bank) have opted to hold their groundThe Reserve Bank of Australia expressed the need to maintain the current interest rate stance for an extended period, aiming to realign inflation with targets as economic forecasts emerge

In Norway, although inflation has trended downward quicker than anticipated, the central bank highlights the need to retain a tactical and restrained monetary policy due to the ramifications rate cuts can pose on exchange rates and import prices.

Overall, the progressive shift of developed economies' monetary policy towards easing continues, with the precise scale of this shift heavily influenced by variables such as employment and inflation dataCurrent real interest rates present another valuable lens through which to gauge monetary directionNotably, Australia’s real policy rate sits at 0.6%, a near-neutral territory with limited room for further cutsOther regions like Korea, the Eurozone, and Norway find themselves within a real policy rate range of 1% to 2%, indicating restricted policy flexibility should inflationary pressures persistIn stark contrast, the United States, the UK, Sweden, and New Zealand exhibit real policy rates exceeding 2%, signaling potentially more expansive monetary policy leeways