Global financial conditions are experiencing an unprecedented divergence. On one side, the US Federal Reserve and the Bank of England linger near easing policies, while on the other, the central banks of Australia, New Zealand, and Japan have quietly moved into the tightening camp.
Major global central banks are charting different courses. This week, Australia raised interest rates for the first time in two years. Even as other central banks may have concluded their easing cycles, they continue to adopt a more cautious stance.
Both the European Central Bank and the Bank of England held rates steady on Thursday. Despite this, the Bank of England's decision was perceived with a distinctly dovish tone, while the Federal Reserve remains firmly in the accommodative policy camp.
Here is the current situation for ten developed market central banks:
1. United States The Federal Reserve held rates steady last month and signaled that it may be a long wait before further rate cuts. However, traders have fully priced in another 25-basis-point cut by July. Kevin Warsh, a nominee of former President Trump, is set to succeed Chair Powell when his term ends in May. Warsh has previously called for rate cuts and balance sheet reduction. This policy mix could steepen the US Treasury yield curve, though the overall direction of rates remains uncertain.
2. United Kingdom The Bank of England held rates steady on Thursday, but the vote was a surprisingly narrow 5-4. With wage growth slowing, further easing has become a realistic option. This unexpected dovish tilt caused the policy-sensitive 2-year government bond yield to record its largest single-day drop since April 2024. Traders now anticipate nearly 50 basis points of rate cuts by year-end.
3. Norway Norway's central bank held its benchmark rate at 4% last month and reiterated that a rate cut later this year is possible, though not imminent. However, further easing is inconsistent with recent data. Norway's core inflation rate unexpectedly rose to 3.1% in December, highlighting the resilience of domestic demand.
4. Switzerland The Swiss National Bank's policy rate stands at 0%, the lowest among major central banks, and is likely to remain unchanged for now. While long-term inflation expectations are within the 0-2% target range, the bank faces an awkward situation: price pressures remain subdued while the safe-haven Swiss franc trades at multi-year highs against the US dollar and euro.
5. Canada The Bank of Canada held its rate at 2.25% in January. Policymakers warned that geopolitical risks and uncertainty surrounding US trade policy could deliver new shocks to the economy, potentially necessitating further monetary easing. Canada's economic growth slowed in November as tariff uncertainty weakened business confidence and dampened investment.
6. Eurozone The European Central Bank held its benchmark rate at 2% on Thursday, as expected. Although traders anticipate no changes this year, recent dollar weakness, volatility in commodity markets, and pressure from the US administration regarding Greenland suggest conditions could shift rapidly.
7. Sweden Sweden's Riksbank held its rate at 1.75% on January 29th, signaling that policy would likely remain unchanged "for some time ahead." Although the Swedish economy is expected to recover and inflation to cool this year, geopolitical risks continue to loom.
8. New Zealand New Zealand is shifting towards a hawkish stance. With annualized inflation accelerating to 3.1% in the fourth quarter, the Reserve Bank of New Zealand has likely ended its easing cycle. Markets now anticipate two 25-basis-point rate hikes before the end of the year.
9. Australia The Reserve Bank of Australia raised interest rates on Tuesday, just six months after its last cut in August. Data shows strong consumer spending, record-high house prices, and ample credit for households and businesses. These signs reinforce concerns that financial conditions are far from restrictive. Traders expect another rate hike by mid-year.
10. Japan The Bank of Japan was previously the sole central bank committed to tightening, but it is no longer alone. Policymakers have warned that a weak yen is generating stronger-than-expected price pressures, with some concerned that policy may be lagging. The BOJ raised rates to a 30-year high in December before holding them steady in January. However, the dovish leanings of Prime Minister Takaichi Sanae could complicate the central bank's path, particularly if she secures a strong mandate in Sunday's snap election.
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