Has the easing cycle started?

Most developed-market central banks unambiguously confirmed their easing bias this week, with the Swiss National Bank (SNB) becoming the first to deliver a 25bp cut. Against trend, the Bank of Japan hiked rates for the first time since 2007.

We continue to expect the Federal Reserve, the European Central Bank (ECB) and the Bank of England to start cutting rates in June. More importantly, the debate has started over the pace and extent of the easing cycle.

The US economy stands out as the outlier in terms of labour market resilience, slower monetary transmission and stickier inflation, raising the risk that the Fed does not deliver the five cuts we forecast for this year. However, we believe that a further normalisation of inflation to an acceptable level of “two point something” would be enough for the Fed to start dialling back policy tightening in June.

In Europe, we view the large downward revisions to the SNB’s inflation forecasts as clear guidance that the central bank will deliver additional easing in the coming quarters. We expect the SNB to cut policy rates again in June, to 1.25%, with a risk of another move later this year. We also expect the Bank of England to cut rates in June, and to ease by 100bp in total this year, bringing the bank rate down to 4.25%. There is still a risk that the BoE wants to play it safe and waits until August. Either way, we continue to believe that once it starts cutting, the BoE will have some room to go given a relatively high starting point, with an easing cycle that could extend well into 2025. Likewise, our expectation is that the ECB will cut its deposit rate by 25 bps in June, pause in July (despite pressure from the policy doves) and resume cutting at every Governing Council meeting from September on.

Overall central bankers could now target a more neutral stance so as not to ease too much and risk a resurgence of inflation. But the neutral rate is an elusive concept and almost impossible to estimate in real time. Moreover, the new macro environment facing central banks will likely be characterised by the prominence of supply shocks as well as fiscal and geopolitical risks, resulting in greater uncertainty and macroeconomic volatility.