One Hike, Three Hints, and a Surprise Rate Cut

Last week, five of the world’s major central banks made news. The Bank of Japan (BOJ) and the Swiss National Bank (SNB) announced important changes to monetary policy, and officials at the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England (BOE) dropped meaningful hints about the likely road ahead for interest rates. Taken together, these moves and signals offer insights into future monetary policy and in particular, the challenges the Fed, the BOE, and the ECB may face in execution and communication as they begin to cut policy rates with inflation in their countries projected to be running above target in 2024 and into 2025.

BOJ and SNB each turn the page after key objectives achieved

The BOJ decision on 19 March to end its negative interest rate policy (NIRP) and to hike rates for the first time since 2007 was widely expected but nonetheless significant. It signaled the bank’s confidence that the extraordinary policies of NIRP, yield curve control, and quantitative and qualitative easing have at long last achieved their elusive goal: ending Japan’s secular deflation equilibrium and shifting into a “1-point-something” inflation regime, with inflation expectations firmly anchored in positive territory. (We would note that alongside BOJ policy, the post-pandemic inflation spike along with the sharp contrast in rate policy versus other major regions played a significant role in reflating Japan’s economy. For details, please see our blog post, “Bank of Japan’s Policy Shift Ushers in a New Era for Investors.”)

The SNB’s decision on 21 March to cut its policy rate by 25 basis points was a bit of a surprise relative to market pricing. Nonetheless, the move confirmed that in SNB officials’ judgment, the rate hikes enacted in 2022 and 2023 to counter the post-pandemic inflation surge have achieved the objective of returning Swiss inflation to somewhat below 2%.

In sum, both central banks changed policy last week because officials believed that the previous policies they put in place had achieved their long-run objectives.