Inflation in several advanced countries has continued to drop over the past few months as they avoided a hard landing in their economies. This means major central banks’ aggressive interest rate hikes over the past two years to curb rising consumer prices have been successful. It also suggests that there is about to be a turning point with a potential pivot by central banks to shift toward less restrictive monetary policies.
On Wednesday last week, the US Federal Reserve in its policy-setting Federal Open Market Committee meeting unanimously agreed to keep the target range of its Fed funds rate unchanged at 5.25 to 5.50 percent. It was the fourth pause by the US central bank this year after having raised rates 11 times since March last year. It also hinted at three 25 basis-point cuts next year as a new phase in monetary policy is approaching.
A day later, the European Central Bank maintained its three key interest rates on main refinancing operations, the marginal lending facility and the deposit facility at 4.5 percent, 4.75 percent and 4 percent respectively for a second successive meeting.
As expected, the Bank of England on Thursday decided to keep its key policy rate at 5.25 percent for the third consecutive meeting, but stressed that its monetary policy would remain restrictive until inflation falls to the 2 percent target in the medium term.
Meanwhile, the Australian central bank on Dec. 4 kept its cash rate unchanged at 4.35 percent, the first pause after a hike of 25 basis points last month.
On Thursday, Taiwan’s central bank also maintained its discount rate, the rate on refinancing of secured loans and the rate on temporary accommodations at 1.875 percent, 2.25 percent and 4.125 percent respectively, keeping them the same for a third consecutive quarter.
There is no doubt that the interest rate hike cycle of major central banks is coming to an end as inflation gradually recedes and concerns about an economic slowdown grow. The market’s focus has turned to whether central banks plan to cut rates.
Taiwan’s central bank last week said it might not follow the Fed in lowering interest rates next year as the situation in Taiwan is different than in the US.
First, most research institutes expect Taiwan’s economy next year to grow about 3 percent, while the US’ GDP growth is expected to slow down.
Second, Taiwan’s inflation might ease more slowly than expected, given that the central bank last week revised its inflation forecasts for this year and next year upward to 2.46 percent and 1.89 percent respectively, from previous estimates of 2.22 percent and 1.83 percent. In contrast, the Fed last week lowered its inflation forecasts for the same period to 2.8 percent this year and 2.4 percent next year, from its earlier estimates of 3.3 percent and 2.5 percent respectively. This reduces the likelihood of rate cuts in Taiwan.
Third, domestic interest rates have since early last year been much more stable than the US’, rising only 75 basis points compared with the 525 basis-point increase in the US over the same period, giving the former more leeway in exercising its monetary policy. Therefore, the timing of Fed rate normalization would not have a significant impact on the Taiwanese central bank’s rate decisions next year.
There is a growing divergence in the timing of central banks’ rate cuts for next year, as some are concerned about slowing economic activity and employment, while others insist that future interest rate decisions would remain data-dependent. This division not only reflects the material differences in the economic fundamentals of countries, but also signals that macroeconomic uncertainties and geopolitical conflicts can be expected to add to central banks’ wait-and-see stance.
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