Coming Soon: Interest Rate Cuts, Rather Than Hikes

Coming Soon: Interest Rate Cuts, Rather Than Hikes
Reda Farran, CFA

5 months ago2 mins

Mentioned in story

Last week, central banks in the US, the UK, Japan, and Switzerland all kept interest rates unchanged, leading the chief global economist at research outfit Capital Economics to declare that “the global monetary tightening cycle has ended”. In other words, she thinks that central banks are mostly done hiking interest rates. And it’s not just some gut feeling: for the first time since the end of 2020, more of the world’s 30 biggest central banks are expected to cut rates in the next quarter than raise them, according to Capital Economics.

Not coincidentally, this change in attitude is happening just after a big slide in inflation in many parts of the world. The pace of price gains has dropped by more than half in the US, the eurozone, and many other regions. But at the same time, there’s also growing evidence that the world economy is slowing. The OECD recently lowered its global growth forecast for 2024 to 2.7%, from the previously forecast 2.9%, as high interest rates weigh on economic activity and China’s once-vaunted rebound disappoints. Not counting Covid-plagued 2020, that would be the weakest annual expansion since the global financial crisis.

In this new environment marked by gradual disinflation and slowing growth, financial markets are clearly reacting. Traders are currently pricing in no additional rate hikes from most major central banks and anticipate rate cuts from many of those in developing countries. Emerging economies, after all, did a better job than developed ones at navigating last year’s inflation shock, with central banks in Latin America and Eastern Europe acting more quickly to raise rates in response to inflationary pressures. So with price gains cooling, that creates scope for interest rate cuts, which would, in turn, lower bond yields and push up bond prices. If you like the sound of that, the iShares JP Morgan USD Emerging Markets Bond ETF (EMB; 0.39%) provides an easy way to gain diversified exposure to EM government bonds issued in US dollars.



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