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Central Banks pause on rate cuts!

Central Banks pause on rate cuts

Central banks, traditionally prudent institutions, are exhibiting caution about joining the global trend of cutting interest rates. This week, several key decisions are expected from central banks in advanced economies, which might reveal their stances on this matter. Despite the Federal Reserve's recent revision of its US monetary easing projections, central banks in countries such as the United Kingdom and Australia are likely to indicate that they are not yet convinced enough about disinflation to reduce borrowing costs. This cautious approach among central banks suggests that June, which was initially seen as the beginning of a global rate-cutting cycle, may instead highlight widespread hesitancy.

This period of indecision is a stark contrast to earlier expectations. While Canada initiated a rate cut on June 5, the subsequent action by the European Central Bank (ECB) was accompanied by an increased inflation projection, signaling limited enthusiasm for further easing. The ECB’s move, though significant, was tempered by the reality of persistent inflationary pressures, which dampened the optimism for a sustained series of rate reductions. This reluctance underscores the complex economic environment that policymakers are navigating, marked by a delicate balance between fostering growth and containing inflation.

In the United Kingdom, the Bank of England (BoE) is expected to maintain its current rates during its meeting on Thursday. The looming general election and persistent inflationary pressures make it likely that any rate cuts will be postponed until at least August. This cautious stance reflects the BoE’s need to carefully manage the economic implications of political uncertainty and inflation. Similarly, central banks in Australia and Norway, also meeting this week, show no urgency to reduce rates. In Australia, the Reserve Bank of Australia (RBA) is contending with a recent uptick in consumer prices, which complicates the decision to ease monetary policy. Meanwhile, in Norway, robust economic activity and wage pressures suggest that rate cuts may be deferred until next year.

In Switzerland, the situation is equally complex. Half of the economists surveyed believe that the Swiss National Bank (SNB) will hold off on another rate cut after its significant move in March. The SNB’s cautious approach is driven by the need to guard against inflationary risks and prevent a depreciation of the Swiss franc, which could undermine economic stability. This divergence in monetary policy approaches among major central banks highlights the varied stages of global economic cycles and the differing challenges each economy faces.

Other decisions this week will reflect these varied stages of global monetary cycles. In South America, Brazil and Paraguay are expected to maintain their borrowing costs, reflecting stable economic conditions and inflation rates that do not warrant immediate intervention. On the other hand, Chile is anticipated to slow its rate-cutting pace, highlighting the nuanced approach required in managing economic growth and inflation. These decisions underscore a broader trend of caution among major central banks, including the Bank of England and the Swiss National Bank, which appear set to keep interest rates steady for now.

Investors will be closely monitoring economic indicators from several key markets this week, including US retail sales, Chinese economic data, and inflation numbers from the UK and Japan. After recent reports indicating moderating US inflation, new data on consumer demand, housing, and industrial production will be released, providing further insights into the health of the US economy. These data points are crucial for understanding the broader economic landscape and the potential for future monetary policy adjustments.

In the United States, retail sales data due on Tuesday is expected to show a rebound in consumer spending in May, following a decline in April. This rebound would underscore the resilience of the US consumer, a key driver of economic growth. Separate reports are projected to indicate increased production in factories, mines, and utilities, suggesting a robust industrial sector. Housing starts data on Thursday may reveal a modest rise in construction activity, despite challenges in the resale market and higher mortgage rates affecting existing home sales. These mixed signals reflect the complexity of the current economic environment, with pockets of strength and weakness influencing policy decisions.

The Bank of Canada will provide a summary of its recent rate-cut decision, offering insights into the factors that influenced its policy stance and potential future directions. This summary will be closely watched by market participants for clues about the conditions that might prompt further easing. Statistics Canada will release first-quarter population estimates and retail sales data, shedding light on the strength and composition of the Canadian consumerbase. These data points will be crucial for understanding the overall health of the Canadian economy and the potential for future monetary policy adjustments.

China’s monthly economic data, released on Monday, is likely to show slightly below-average gains in industrial output and retail sales for May. This suggests that the Chinese economy is experiencing a period of slower growth, with steady fixed asset investment and a deeper decline in property investment. The Reserve Bank of Australia is expected to hold its cash rate target at 4.35% on Tuesday, with attention focused on inflation trends after an unexpected rise in consumer prices in April. This slowing pace of disinflation could potentially delay a pivot to rate cuts or even spur another rate hike, highlighting the delicate balance policymakers must maintain.

In Japan, consumer inflation for May is anticipated to have accelerated to 2.6%, potentially prompting a rate hike from the Bank of Japan. This would be a significant move, reflecting the central bank’s efforts to manage inflationary pressures and stabilize the economy. Meanwhile, New Zealand’s economic growth may have turned positive in the first quarter, following two quarters of contraction. This positive growth trend would indicate a recovering economy, bolstering confidence in future economic stability.

Japanese trade data for May may show the fastest export growth since November 2022, indicating a strong external demand for Japanese goods. This would be a positive sign for Japan’s economy, suggesting that the global demand for Japanese products remains robust. Trade statistics will also be released for Singapore, Malaysia, South Korea, and Indonesia, providing a broader view of economic activity in the region. The week will conclude with PMI figures from Australia, Japan, and India, offering further insights into manufacturing and economic trends in these key markets.

In the United Kingdom, consumer price data preceding the Bank of England’s decision on Thursday may show inflation reaching the 2% target for the first time in nearly three years. However, with core inflation likely above 3% and an election campaign underway, economists predict no change in borrowing costs until August. This cautious approach reflects the BoE’s need to balance inflation control with political stability. The Swiss National Bank’s decision on Thursday is equally uncertain, with economists split on whether another rate cut will occur.

Norway’s central bank is expected to keep its rate at 4.5% for the fifth consecutive meeting, reflecting a cautious approach to monetary policy. Investors will be keen to understand how improving economic activity and wage pressures might delay rate cuts until next year. This decision highlights the complex economic landscape and the need for careful policy calibration.

In Hungary, the central bank is nearing the end of its long monetary easing cycle, although a declining forint may limit further rate cuts. This highlights the challenges faced by emerging economies in balancing currency stability with economic growth. In the eurozone, purchasing manager indexes for June will provide insight into economic momentum, indicating whether the region’s economic recovery is gaining traction. Key ECB officials, including President Christine Lagarde, will speak early in the week, providing further insights into the central bank’s policy stance.

The European Commission will release its verdict on fiscal discipline on Wednesday, with financial stability likely a topic at the eurozone finance ministers’ meeting in Luxembourg. This meeting will be crucial for understanding the broader fiscal and economic policies within the eurozone.

In South Africa, inflation is expected to remain steady at 5.2% in May, reflecting stable economic conditions. Meanwhile, Namibia is set to maintain its rate at 7.75% to manage consumer price growth and maintain its currency peg with the rand. These decisions highlight the challenges faced by African economies in managing inflation and currency stability.

Chile’s central bank is expected to cut its key lending rate for the eighth consecutive meeting, though the pace of easing may slow. This cautious approach reflects the need to balance economic growth with inflation control. Paraguay’s central bank may keep its rate unchanged at 6% for the third straight meeting after a rise in consumer prices in May, reflecting a stable economic environment.

In Mexico, much focus will be on the presidential transition and its potential economic impacts. Weak retail sales and GDP data for March may extend into April, reflecting ongoing economic challenges. Colombia’s economy showed weaker-than-expected growth in the first quarter, with negative GDP-proxy prints for February and March. April’s data may indicate a rebound in economic activity, providing hope for future growth.

Brazil’s central bank may conclude its easing cycle, keeping the benchmark Selic rate at 10.5% amid inflation concerns and increased government spending. Analysts now forecast the key rate at 10.25% by the end of 2024, reflecting an upward revision in rate expectations since March, while market projections suggest potential tightening towards the year’s end. This highlights the complex economic environment and the need for careful policy management to balance growth and inflation. Source: Bloomberg

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