Source: Caixin News

Author: Xiaoxiang

Interest rates are being lowered! Interest rates are being lowered! Interest rates are being lowered!

Within one day, the three European central banks successively cut interest rates within just a few hours, evidently once again sounding the "war drums" of the global easing wave. Before Trump returns to the White House, the dovish turn of many major central banks has undoubtedly become increasingly resolute, with central bank decision-makers hoping that this move will help their economies cope with further disruptions.

Policy makers at the European Central Bank, Swiss Franc Central Bank, and Danish Central Bank all announced interest rate cuts on Thursday, which leaves no doubt that they may continue to adopt an easing policy in the coming year to mitigate the impact of unknown factors such as trade tensions and currency fluctuations triggered by geopolitical issues.

The most aggressive action on Thursday came from the Swiss Franc Central Bank. As the "pioneers" of this round of rate cuts among developed countries and major economies, the Swiss Franc Central Bank unexpectedly announced a 50 basis points cut that day (with an expectation of 25 basis points), which means that the country's benchmark interest rate now only has 50 basis points (0.5%) left to zero interest rate. This is also the largest rate cut announced by the Swiss Franc Central Bank since it suddenly decided to abolish the 1.20:1 exchange rate peg of the Swiss Franc to the Euro in January 2015.

On Thursday evening, Beijing time, the European Central Bank also announced an interest rate cut, lowering the three key rates by 25 basis points; this is the third consecutive cut by the bank and the fourth cut in the year. European Central Bank President Lagarde stated that the current direction is very clear. In the short term, economic growth in the Eurozone may slow down, medium-term economics face downside risks, geopolitical risks are rising, and threats to international trade are increasing day by day. According to Lagarde, some members of the governing council had suggested a direct cut of 50 basis points in this resolution, but in the end, "everyone agreed that 25 basis points was the right decision."

Following the European Central Bank, the Danish Central Bank also announced a 25 basis points cut yesterday.

It is worth mentioning that Thursday's policy easing is the last opportunity for the aforementioned Eurozone central bank officials to prepare for Trump's inauguration in January next year. Currently, concerns within these economies about low economic growth or inflation are gradually overshadowing previous worries about persistent price pressures. Moreover, the tariff plans proposed by Trump are likely to further impact the exports of the European region.

Ludovic Subran, chief economist of Allianz, stated, "Currently, there is only one direction for European interest rates – to lower. The real question is how long the rate cuts will last. I believe there is a risk for the European Central Bank: it may be forced to lower rates faster and more significantly than currently expected."

According to Subran, the rise of Trump will only further amplify the challenges already facing the European continent. "The European economy is struggling with many domestic challenges, and Trump's threat of imposing trade tariffs is making matters worse."

In fact, concerns about the U.S. government transition are also clearly reflected in other parts of the world. Just before the actions of the three major Eurozone central banks mentioned, the Bank of Canada had already recognized the danger of increased trade tariffs from its southern neighbor, and on Wednesday lowered interest rates by 50 basis points.

Bank of Canada Governor Macklem stated at a press conference following the meeting that President-elect Trump promised to impose a 25% tariff on goods imported from Canada at the beginning of his term, which constitutes an element of uncertainty that may exacerbate the overall chaos in the Canadian economy.

The following figure shows the interest rate changes of G10 central banks so far this year:

It is not difficult to see that currently seven out of the G10 central banks are in an easing cycle. Among these seven central banks, the Bank of Canada has had the largest rate cuts this year, while the Swiss National Bank currently has the lowest interest rate. Two central banks – the Norges Bank and the Reserve Bank of Australia – have yet to enter the easing cycle, but it is generally believed that they will also begin lowering rates next year. As for the remaining Bank of Japan, it is destined to continue its unique monetary policy journey: raising interest rates!

The following is an overview of the current monetary policy situation of G10 central banks (arranged roughly from dovish to hawkish):

Swiss National Bank: The Swiss National Bank, which has been at the forefront of monetary easing, unexpectedly cut interest rates sharply by 50 basis points to 0.5% on Thursday, marking the lowest level since November 2022 and the largest cut in nearly a decade. Recent inflation in Switzerland has only increased by 0.7% year-on-year, and the Swiss National Bank indicated that further reductions in borrowing costs may occur next year, as there are concerns that the appreciation of the safe-haven currency, the Swiss Franc, may exceed what domestic exporters can bear.

Bank of Canada: The Bank of Canada cut interest rates by 50 basis points to 3.25% on Wednesday, marking its first consecutive cut of 50 basis points since the outbreak of the COVID-19 pandemic. The Bank of Canada stated that after inflation accelerated to 2%, further easing will be gradual, but market participants still believe there is a 70% probability of a 25 basis point cut next month, as Canada's weak economy has been affected by tariff threats from the recently elected U.S. President Trump.

Swedish National Bank: The Swedish economy is shrinking, and the country's central bank lowered the benchmark interest rate by 50 basis points to 2.75% in November, guiding market expectations for further easing next year. The Swedish National Bank will hold a monetary policy meeting next week, and the market believes there is a significant possibility of another 25 basis point cut, with roughly 90 basis points of room for cuts by August next year.

Reserve Bank of New Zealand: The Reserve Bank of New Zealand painted a grim economic picture in its latest Financial Stability Report. Although it will not set interest rates again until February next year, traders believe there is a substantial opportunity for rapid and aggressive rate cuts. So far, the Reserve Bank of New Zealand has cumulatively lowered the cash rate by 75 basis points to 4.25%, and the market expects the cash rate to drop to just above 3% by the end of 2025.

European Central Bank: The European Central Bank firmly continued its easing measures on Thursday, reducing the deposit rate by 25 basis points to 3%, marking the fourth rate cut of the year and opening the door for further reductions. The European Central Bank also removed the terminology of maintaining interest rates as 'sufficiently restrictive', indicating that consecutive cuts may be possible. 'Sufficiently restrictive' refers to borrowing costs that would suppress economic growth. The market expects the European Central Bank to further cut rates by approximately 130 basis points by the end of 2025.

Federal Reserve: Given the strong economy and the increasingly complex inflation outlook in the USA due to tax cuts and import tariffs proposed by President-elect Trump, the Federal Reserve is taking a more cautious approach to easing monetary policy. Although the Federal Reserve lowered the target range for the federal funds rate by 25 basis points to 4.5%-4.75% in November, and traders expect another 25 basis point cut next week, the Fed's room for cuts next year may be limited as U.S. consumers are optimistic about economic and income prospects and are ready to continue spending.

Bank of England: The Bank of England lowered interest rates by 25 basis points in November, marking the second rate cut since 2020. The Money Market suggests a 90% chance that the Bank of England will keep rates stable at its next meeting on December 19. Traders currently expect the UK's benchmark interest rate to gradually decline from the current 4.75% to about 3.9% by the end of 2025, as increased government spending under the new Labour Party leadership is expected to boost economic growth and keep the inflation rate above the Bank of England's target of 2%.

Norwegian Central Bank: The Norwegian Central Bank has not yet begun implementing easing policies and kept the policy interest rate at a 16-year high of 4.5% in November, guiding the market not to expect a rate cut at the meeting on December 19. A strong economy has currently pushed Norway's core inflation rate up to an annual rate of 3% in November, deviating from the central bank's target of 2%. The market currently expects the Norwegian Central Bank to cut rates before March next year.

Reserve Bank of Australia: The Reserve Bank of Australia kept the interest rate steady at a 12-year high of 4.35% this Tuesday, but the tone regarding inflation has softened, raising market expectations of a 50% chance of a 25 basis point cut in February next year. The Reserve Bank of Australia has not adjusted interest rates for more than a year, and its policymakers have now noticed an unexpected slowdown in economic growth, as high interest rates are hindering consumer spending despite the recent tax cuts.

Bank of Japan: The rising inflation rate prompted the Bank of Japan to raise interest rates to 0.25% in July, which severely disrupted yen arbitrage trading supported by its ultra-loose monetary policy and led to the 'Black Monday' event in global markets at the beginning of August. Since then, the Bank of Japan has kept interest rates unchanged. Currently, the interest rate market expects that the Bank of Japan may keep rates unchanged again next week, but there is a high likelihood of a 25 basis point hike in January.

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Editor/Rocky