Central banks were at a turning point last week, with Switzerland the first of the major economies to cut interest rates, while Japan raised them for the first time in 17 years.

Markets are trying to determine when the big and powerful central banks will begin to loosen their tight monetary policy, which they have implemented for two years in an attempt to tame high inflation.

The exception

An exception is the Bank of Japan, which has kept interest rates at negative levels for 17 years, with the aim of stimulating its economy but also boosting inflation. That tactic, combined with its unconventional policies of yield curve control and quantitative easing, came to an end last Tuesday.

Japan is eyeing a wage hike, following ongoing negotiations between labor unions and Japan Inc. Bank of Japan (BOJ) officials estimate that higher wages will boost domestic demand and consequently boost inflation.

Tomoya Masanao, co-head of Pimco Japan, reckons both the medium- and long-term effects will be more substantial than markets expect, with a key question, however, being where inflation will stabilize in the country in the post-pandemic period .

“Although the BOJ has maintained its inflation target at 2%, it is unlikely in our view that it will maintain its accommodative monetary policy indefinitely to keep this target stable,” added Masanao.

Surprise

A surprise for the markets was the Swiss Central Bank, which last Thursday cut its key interest rate by 0.25% to 1.5%, saying that inflation in the country will remain below its target of 2% in near future.

Both core and core inflation have remained below that target since June and May 2023, respectively, and the Swiss National Bank cut its estimates, forecasting inflation to stand at 1.4% this year. to 1.2% in 2025 and to 1.1% in 2026.

However, she stated that the strengthening of the Swiss franc also played an essential role in her decision to relax the monetary policy.

The Fed promises three reductions

The US Central Bank, Fed, kept interest rates unchanged in the range of 5.25%-5.5%, as was expected, reiterating its intention for 3 cuts (25 basis points each) by the end of year.

The chances given by the markets for the first reduction to come in June are currently at 70%. Expectations for a decline remain despite forecasts for stronger growth, lower unemployment and marginally higher-than-expected structural inflation.

¨Signal’ from the Central Bank of England

The Central Bank of England also kept interest rates steady at 5.25%. But she gave a “signal” for her next moves. In the last meeting, in contrast to the previous one where two members of the Monetary Policy Committee were in favor of an increase of 25 basis points, with 8 members voting in favor of staying at current levels and one member in favor of a reduction.

The central banker, Andrew Bailey, even said that the fundamentals of the economy are moving in the right direction for a rate cut, with inflation falling faster than expected.