Thoughts

November 08, 2024 | 14:15

Caution Ahead: Central Banks Cut, Hike, and Hold

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

It’s been quite the whirlwind week. The U.S. election was the biggest story (maybe ever… it is being referred to as “the greatest political comeback in history!”), but not the only one. The collapse of the German coalition government was another. With the exit of the pro-business Free Democrat Party, only Chancellor Olaf Scholz’ SPD and Vice-Chancellor Robert Habeck’s Green Party are left. And those on the other side of the aisle are restless: the CDU’s Friedrich Merz is calling for a confidence vote ASAP (or next week) and an election in January; but, Scholz said hold on… no elections until March 2025. And what will happen to Mario Draghi’s plans for joint EU funding? The European Council gathered in Budapest yesterday (a scheduled meeting), where the EU Council President Charles Michel urged unity… that “Europe must do more to strengthen its single market, boost competitiveness, and improve its ‘European defense capabilities’.”

Then there were all the central bankers who were deciding on monetary policy… besides the FOMC.

The BoE trimmed its Bank Rate 25 bps to 4.75%, a move supported by all but one policymaker. But, with the Autumn Budget expected to lift GDP growth and inflation, we now look for only three rate cuts next year (not five). And no move at the December 19 meeting. We must remember that all central bankers are data-dependent. Indeed, after musing aloud back in October about how the Bank could be “a bit more aggressive” on rate cuts if inflation comes down faster than expected, Governor Bailey now says that the Bank cannot cut rates “too quickly or by too much”. Sweden's Riksbank was aggressive, taking its key rate down 50 bps to 2.75%, although it did give markets the heads up of this possibility at the prior meeting. Brazil went the other way and hiked rates for the second time in a row. This time, it was by a more aggressive 50 bps to 11.25%, and there could be more to come as inflation risks are “tilted to the upside”. Then, there was the RBA. It held the cash rate at a 13-year high of 4.35%; and given that Governor Bullock still sounded hawkish, well, I threw in the towel and moved Australia's first cut to February. The Norges Bank also held its policy rate at a 16-year high of 4.50%, and said that there would not be a cut in December, and that Norway's rates would be “gradually reduced” starting in Q1 of 2025.

So, there was a little something-something for everyone!

Note that we have five weeks before the ECB meets again, and it is expected that a 25 bp rate cut will be announced on December 12. Look for continued weakness in Germany as it deals with the fallout from the auto sector’s decline (Schaeffler was the latest name this week to announce job cuts and plant closures); nervousness preparing for Trump 2.0; and, political uncertainty as to who will lead the next government and when. Spain’s data will be slammed by the record flooding that killed over 200 people. Yes, a 25 bp cut should be in the works. The BoJ has one more meeting as well (December 19), and we look for a rate hike, for the usual reasons, with the return of the weak JPY a primary one.