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Switzerland has initiated rate cuts among major central banks, with the European Central Bank expected to follow suit in June, while the Bank of England and the Federal Reserve are anticipated to act before summer’s end, despite inflation showing a downward trend but not yet subdued.
The Swiss National Bank became the first major central bank ease policy on Thursday with a surprise 25 basis point cut to its key rate as inflation is already in the 0% to 2% target range.
The world’s largest central banks are poised to reverse a series of interest rate hikes, albeit with caution, avoiding sudden or dramatic adjustments due to concerns over potential inflation resurgence driven by ultra-low unemployment rates. Unlike the rapid increases seen previously, the descent in borrowing costs will likely be gradual, with periodic pauses, and the eventual bottom for interest rates is projected to be higher than the historic lows of the past decade.
The recent synchronized tightening, initiated in late 2021 in response to post-pandemic supply constraints and rising energy prices amid geopolitical tensions, effectively curbed inflation, bringing it close to or slightly above the 2% target for most major economies this year.
In a note to clients, investment bank Macquarie highlighted that “The bottom line is that across the OECD, central banks… are softening up again, or are about to do so.”
This move dispels speculation that policymakers would wait for the U.S. Federal Reserve to act, as any rate cut is anticipated to weaken the currency and elevate imported inflation. The European Central Bank is slated to act next in June, following repeated references to that meeting, while the Federal Reserve and the Bank of England have hinted at potential actions, maintaining ambiguity in their language to allow flexibility for moves in either June or July, contingent on forthcoming data.
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