From Zurich to London to Washington, the Great Inflation Scare Is Fading

(Bloomberg) — From Zurich to London to Washington, the great inflation scare that gripped the world economy after the pandemic is suddenly no longer keeping central bankers up at night.

Their confidence that raging consumer prices have been tamed is such that the Federal Reserve just defied recent data to keep projecting three interest-rate cuts this year — and then the Swiss on Thursday went ahead and delivered one already.

With UK inflation slowing markedly, the Bank of England’s hawks dropped their push for a hike, while on Wednesday, European Central Bank chief Christine Lagarde echoed her recent signal that a decision to move in June remains on track.

The converging theme across rich-world economies at the end of the first quarter is that a once-in-a-generation cost-of-living shock is subsiding enough to soon shift toward easing mode. As the Swiss National Bank just showed with its surprise quarter-point move, the prospect of rate cuts is becoming real.

“This signals to the world that we have turned a corner,” Philipp Hildebrand, vice chairman at BlackRock and a former president of the SNB, told Bloomberg Television. “Central banks are easing, and the question is, where does all this settle in the long term?”

While policymakers are cautioning that any moves will be gradual, investors — for now — are betting on at least three-quarter-point reductions this year from the Fed, ECB and BOE, with odds favoring the first cut by June for all three.

While that’s much less aggressive than what was anticipated in December, the market is at least zeroing in on a start date as it becomes increasingly convinced policymakers are on the cusp of reversing last year’s tightening campaign.

What Bloomberg Economics Says…

“The Fed and ECB supertankers take a while to pivot. Anticipating their moves, and fearing currency cross currents, the Swiss National Bank is maneuvering ahead of them. A big question going forward – how far will rates fall? If – as many believe – the neutral rate has risen, policy rates may settle somewhat higher than their pre-Covid level.”

-Tom Orlik, chief global economist.

What was always likely to be a pivotal week for monetary policy, with rates being set for almost half of the world economy, has now turned out to be very much that.

Beyond the Bank of Japan’s long-awaited exit from negative borrowing costs on Tuesday, the Fed’s decision on Wednesday to hold firm on the prospect for rate cuts has offered financial markets reassurance that officials aren’t fazed by a recent pickup in inflation.

The SNB’s move went further, markedly lowering its forecast for consumer prices, and exuding a sense of triumph. President Thomas Jordan observed that easing “has been made possible because the fight against inflation over the past 2 1/2 years has been effective.” 

At the BOE, two officials seeking hikes in borrowing costs switched their votes in Thursday’s decision, with the split now 8-1 as one dove keeps up the push for a reduction.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” Governor Andrew Bailey said in a statement. “We need to be sure that inflation will fall back to our 2% target and stay there.”

In the euro region, the ECB has penciled in a June cut ever since the start of the year, and Lagarde’s remarks suggested it’s on track to deliver that. She said in Frankfurt that officials need inflation-relevant data such as wages before they can move. “We will have a bit more by April and a lot more by June,” she said. 

“The bottom line to us from the last 24 hours: the direction of travel for policy rates across the world is lower,” said Matthew Landon, global market strategist at J.P. Morgan Private Bank.

Earlier in the week, even the more hawkish Reserve Bank of Australia showed signs of changing tack. On Tuesday, policymakers there changed the wording of their statement to signal that they’re done with tightening.

The overall progress that central bankers are acknowledging is becoming ever clearer in the global numbers. Inflation in the Group of Seven slowed to 2.9% in January, the lowest since April 2021, according to the Paris-based OECD.

While the bias for central bankers this week is altering, it’s also noteworthy that — aside from the Fed — they’re reluctant to signal much beyond their next move.

Lagarde, in contrast to colleagues speculating on a series of reductions, insisted that “even after the first rate cut, we cannot pre-commit to a particular path.” The SNB took a similar line, with Jordan saying that his central bank doesn’t guide on future moves.

In Norway meanwhile, monetary officials reiterated on Thursday that any easing is probably at least half a year away. A day earlier, Iceland’s central bank chief, Asgeir Jonsson, insisted that it’s too early to reverse western Europe’s most aggressive tightening. With rates currently held at 9.25%, he hopes to start moving in May.

“We think inflation will stay higher than it was during the 2010s in a backdrop of global economic fragmentation and active fiscal policy,” said Hussain Mehdi director of investment strategy at HSBC Asset Management. “This could mean a slow cutting cycle, with rates ending somewhere around 3%.”

Such caution would chime with the views of institutions such as the Bank for International Settlements, whose general manager, Agustin Carstens, warned on Monday that “there will surely be more bumps in the road.” The OECD said in February that “it is too soon to be sure that the inflationary episode that began in 2021 will end in 2025.”

In some countries, that’s very obviously the case. For example, policymakers in Turkey, an OECD member with inflation on track to exceed 70%, raised rates on Thursday in a surprise move ahead of crucial local elections. 

But within the world’s 10-most traded currency jurisdictions, the likely direction for borrowing costs is now lower, with the exception of Japan. Switzerland is now the trailblazer among them, even if its central-bank chief is reluctant to claim that role.

“We are looking at our situation, at our inflation forecast,” Jordan told Bloomberg Television. “We are a small country and we are not leading the world.”

–With assistance from Greg Ritchie, Bastian Benrath, Francine Lacqua and James Hirai.

©2024 Bloomberg L.P.