The Swiss National Bank surprised markets Thursday by cutting interest rates, becoming the first of the world’s major central banks to do so since they began battling a post-pandemic surge in prices.
The SNB announced that it would reduce the cost of borrowing by a quarter of a percentage point as it revised down its forecasts for inflation this year and next. “The fight against inflation over the past two and a half years has been effective,” it said in a statement.
Pressure is also building for the European Central Bank to cut rates for the 20 countries that use the euro. Data released Thursday suggested the region’s economy went backward in March, bolstering the case for the ECB to break with tradition and reduce rates before the US Federal Reserve.
The Purchasing Managers’ Index showed a slight increase to 49.9 in March, driven by expansion in the services sector, but remained below the 50 mark that separates contraction from growth.
Europe’s manufacturers have spent the best part of the past two years grappling with steep energy costs, which surged after Russia invaded Ukraine. Manufacturing remains mired in a deep contraction, according to the latest PMI numbers.
Commenting on Thursday’s preliminary data, Christoph Weil, senior economist at Commerzbank, said the eurozone’s economy likely stagnated “at best” in the first quarter.
“The services PMI now gives some hope that the economy will return to growth in the spring. The recovery is nevertheless likely to be very subdued at first,” he wrote in a note.
It’s a very different story in the United States, where the economy has, despite a turbulent few years marked by high inflation, gone absolutely gangbusters.
Fed officials now expect US gross domestic product to rise 2.1% this year, a sizeable jump from their 1.4% forecast in December. Core inflation, which strips out volatile food and energy prices, was also revised upward to 2.4% on the Fed’s preferred measure. The US labor market, meanwhile, remains resilient, with unemployment at historic lows and elevated wage inflation.
The Fed kept its key interest rate steady Wednesday but continued to signal three cuts later this year. Unlike its European peer, it has the dual mandate of keeping inflation around 2% and aiming for full employment — an objective that can be aided by cutting rates to stimulate hiring. The ECB’s primary concern is to ensure stable prices.
“The ‘why’ of the ECB’s decision comes in stark contrast to the Fed’s,” Felix Feather, an economic analyst at asset manager Abrdn, told CNN. He said the Fed “may choose to lower rates in an effort to pre-emptively stave off risks to the full employment part of its dual mandate.”
Still, ahead of its meeting in April, the ECB has signaled that market expectations of the first rate cut in June are right. Traders are putting a high chance on that outcome and their confidence has increased since Wednesday.
“When it comes to the data that is relevant for our policy decisions, we will know a bit more by April and a lot more by June,” ECB President Christine Lagarde said Wednesday at a conference in Germany.
Annual consumer price inflation in the eurozone has tumbled from a record high of 10.6% in October 2022 to 2.6% in February, not far above the ECB’s 2% target.
A cut at the ECB’s June 6 meeting would see it move before the Fed, which traders also currently expect to cut rates when it meets six days later. The Bank of England, which left rates unchanged Thursday, is expected to follow with its first cut later that month.
Moving before the central bank of the world’s biggest economy would be an unusual step for the ECB.
Lindsay James, investment strategist at Quilter Investors, says the central bank has tended to follow the Fed’s lead, largely because the consequential economic events of the past two decades, such as the global financial crisis, originated on American soil.
“The current economic landscape, however, is different altogether, and central banks are not bound by the moves of the past,” she told CNN.
Cutting rates before the Fed does could cause the euro to lose value against the dollar, pushing up the cost of dollar-denominated imports and — ironically — fueling inflation.
But ECB policymakers are far more concerned right now with boosting the region’s economy, says Adrian Prettejohn, Europe economist at Capital Economics.
The central bank “will probably take some solace looking at inflation (projections) in Switzerland,” he told CNN. “What’s really going to matter for the ECB is what’s happening in their economy.”
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Publish date : 2024-03-21 07:00:00
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