The general trend in monetary policy is towards easing, but especially in the USA, inflation is a hot topic. More information on possible interest rate cuts is expected in upcoming weeks when central banks around the world hold their meetings.
The year got off to a strong start on the Western equity markets. The euro zone in particular has seen positive development and it has performed slightly better than the US market, although the differences are not significant.
The situation on the emerging markets is weaker, however. Underlying factors include especially China’s recent weak performance, which is depressing the entire emerging markets. Furthermore, the dollar appreciated at the end of last year, which adds to the burden on many emerging countries.
The surge in interest rates that began in December has continued for the majority of January. Last week, interest rates in the United States took a slightly more downward path when the country’s inflation figures, released the week before, proved to be more subdued than expected. Inflationary pressure has been one of the key factors affecting the interest rate level. Currently, inflationary pressure seems to have let up slightly, which has also had a downward impact on the fixed income market.
Central bank meetings will be taking place around the world over the next few weeks. The Fed will meet on Wednesday, 29 January, and the markets are not currently expecting an interest rate cut.
When it comes to the Fed, what matters is how the central bank comments on the inflation outlook. Inflation has now moderated close to the central bank’s target. However, the markets believe that the policies of the newly-inaugurated president Donald Trump are inflationary, if Trump decides to enact new import tariffs, for example. A key question on the market is how the Fed will account for the possible acceleration of inflation in its monetary policy.
Whereas the markets are anticipating one or two quarter-point rate cuts by the Fed this year, expectations for the ECB are different. The ECB began its rate cuts faster than the Fed last year and the markets believe that the ECB will continue along the same path. The ECB is expected to carry out three or four rate cuts this year.
The ECB’s interest rate meeting is scheduled to take place immediately after the Fed’s, on Thursday, 30 January. Right now, the markets consider a one-quarter-point interest rate cut to be almost a certainty for the ECB.
In Europe, inflation has fallen, just like in the United States. Economic development in Europe is, however, significantly more subdued than in the USA, and similar policy changes that may accelerate inflation are not expected in Europe. Thus, inflationary pressure is slightly lower in Europe than in the United States. However, it is important to also remember Europe’s exposure to external inflationary shocks.
Although interest rate cut expectations vary between central banks, it is clear that monetary policy is currently heading in a looser direction. The interest rate meeting of the Bank of England on Thursday, 6 February, is also expected to announce a key interest rate cut.
Sweden’s central bank, the Riksbank, will meet on Wednesday, 29 January, with the expectation that an interest rate cut is possible but not certain. The general trend in Sweden is also an easing of monetary policy, although slightly fewer rate cuts are priced in for this year than in the euro zone. The only exception is Japan, which, in deviation of almost all of the other central banks, has recently raised its key interest rate.
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