May 14, 2024/FBNQuest Research

Following the implementation of aggressive monetary policy tightening, global central banks have made significant progress in bringing inflation down to their long-run target of 2%. While headline inflation in the UK eased slightly to 3.2% y/y in March, down from 3.4% y/y the previous month, preliminary data show that inflation in the Euro Zone remained unchanged at 2.4% y/y in April ’24. However, inflationary pressures have been somewhat sticky in the United States of America (US). Headline inflation in the US has risen two consecutive months, accelerating to 3.5% y/y in Mar ’24, compared with 3.2% y/y in Feb ’24. Heightened inflationary pressures in the US can be attributed to higher energy costs stemming from rising gasoline prices.

• In response to concerns about inflationary pressures, the US central bank held interest rates for the sixth consecutive time during its May meeting, aligning with market expectations.
• In its post-meeting statement, the US Federal Reserve acknowledged the progress in attaining its inflation target and highlighted its cautious approach to rate reductions. This is due to the presence of downward sticky inflationary pressures and tight labour market conditions, a strategy that observers should be aware of.
• Furthermore, policymakers reiterated their intention to maintain a restrictive policy to return inflation to its long-term target of 2%.

• Aligning with the US Fed’s policy stance, the Bank of England (BoE) also maintained interest rates at current levels during its May meeting, in line with forecasts.  
• Similarly, we believe the European Central Bank (ECB) will tread a similar path by keeping its benchmark interest rates unchanged when it meets later this month. 
• Citing moderated price pressures, the Swiss National Bank (SNB) became the first major central bank to cut its policy rates, lowering interest rates by 25bps in March. The SNB’s rate reduction signalled a gradual global monetary policy sentiment shift.
• In the same vein, Sweden’s Riksbank reduced its benchmark interest rates by 25bps to 3.75% in May, citing moderated domestic price pressures.
• Looking ahead, we expect divergent trends in the direction of global monetary policy stances because of mixed outcomes in global headline inflation data.
• For the US, we believe the Federal Reserve will delay interest rate cuts until it is certain on the downward trajectory of inflation. As a result, the US central bank’s projection of a 75bp rate cut this year appears doubtful.
• However, we expect the ECB and the BOE to lower borrowing costs sometime this year.
• While we think the BOE may need more clarity on headline inflation moving towards its target before it reduces interest rates, we believe the March inflation reading of 2.4% y/y in the Euro Area is closer to the ECB’s long-run target of 2%. As such, the possibility of a rate cut could happen as early as June.
• However, downside risks arising from persistent tightness of labour market conditions and renewed tensions in the Middle East could disrupt supply chains and push global inflationary pressures higher. This could scupper the plan by major central banks to gradually loosen global monetary conditions.