Raise or Cut Interest Rates... Major Countries' Monetary Policies at a Crossroads

Tightening or easing. The 'monetary policies' of major advanced economies, which have followed the same trend over the past four years, are now at a crossroads. As the economic trajectories of each country diverge, cracks are appearing in the policy paths and speeds of central banks.

According to Bloomberg on the 19th, while interest rate cuts are anticipated this year from the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), New Zealand is expected to raise interest rates as early as this month to bring inflation down to its target. The market currently views New Zealand's rate hike as imminent. ANZ Bank forecasted that the hike could be implemented as soon as the 28th.

The report stated, "The synchronization trend in monetary policy observed among advanced country central banks over the past four years is weakening. New Zealand is expected to break the pack," adding that "this is due to a greater emphasis on each country's individual circumstances rather than global trends."

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New Zealand is not the only country where additional rate hikes are being discussed. Michelle Bullock, Governor of the Reserve Bank of Australia (RBA), said at the meeting on the 6th, "We cannot rule out further rate increases." This statement threw markets, which had anticipated dovish (monetary easing-preferred) signals, into confusion.

JP Morgan, in an investor note released on the 12th, predicted that the central banks of Canada and Australia would maintain a more hawkish (monetary tightening-preferred) stance compared to other global central banks. Japan, which has struggled for decades to overcome deflation, is also rumored to consider a rate hike within a few months. This would be the first rate increase since 2007.

On the other hand, the Swiss National Bank is expected to cut rates as early as next month. In the Eurozone, which narrowly avoided a recession, inflationary pressures have eased faster than expected, lending support to recent calls for early rate cuts. The market is confirming expectations that the ECB could begin cutting rates as early as April.

However, ECB President Christine Lagarde recently expressed caution, stating, "More evidence is needed to confirm that we are continuously moving toward the 2% price stability target." In the UK, where recession concerns and high inflation coexist, the Bank of England (BOE) may face increasing difficulties in determining the direction of monetary policy, the report said.

In the U.S., stronger-than-expected economic indicators have somewhat dampened early rate cut expectations. The March cut speculation that was raised at the beginning of the year has lost momentum, and the June outlook is now dominant. According to the Chicago Mercantile Exchange (CME) FedWatch, the interest rate futures market currently reflects over a 70% probability that the Fed will cut rates by at least 0.25 percentage points at the June Federal Open Market Committee (FOMC) meeting.

The report cited the International Monetary Fund (IMF)'s recent economic growth forecasts, analyzing that while the U.S. economic outlook has improved, the Eurozone's has worsened. This divergence in economic trajectories among countries explains the differing monetary policy outlooks. Bond traders expect that in one year, benchmark interest rates will fall by about 1 percentage point in the U.S., about 1.2 percentage points in Europe, but only 0.4 percentage points in Australia, while Japan's rates are expected to rise by 0.3 percentage points.

James McIntyre, an economist at Bloomberg Economics, said, "While there was solidarity in fighting inflation, it is inevitable that some will break away as circumstances change," adding, "At least initially, individual countries' situations will play a greater role in the transition to rate cuts." Mickey Levy, a visiting researcher at the Hoover Institution, diagnosed, "Central bank officials face various inflation and economic conditions when determining the policy rates necessary to achieve their targets."

Meanwhile, the minutes of the Fed's January FOMC meeting and the ECB's meeting will be released on the 21st and 22nd, respectively. Attention will focus on discussions among rate-setting committee members regarding the timing and magnitude of cuts, economic outlooks, and inflation assessments.

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