Interest Rates Fall, but Central Banks Are No Longer in Lock Step
Two years ago, central banks around the world were engaged in a battle against high inflation that resulted in an aggressive and synchronized jump in interest rates.Now, many policymakers are reversing course — but in a less coordinated way as price increases slow at different paces in various countries.Central bankers in some emerging markets began cutting rates last year.
European officials started a slow and cautious easing of interest rates just a few months ago.The biggest outlier had been the Federal Reserve, which had kept rates high for more than a year and throughout the summer.
On Wednesday, it joined the crowd and cut rates — in a big way — for the first time since the early days of the pandemic.“A few months ago, we were still in the space of American exceptionalism,” said Katharine Neiss, an economist at PGIM Fixed Income, an asset manager.There was the expectation that the resilience of the U.S.
economy would lead to higher rates for longer, she said.“That was creating a lot of stresses and strains for the rest of the world,” she added.If the Fed’s rate cut on Wednesday can ensure a so-called soft landing for the U.S.
economy, where inflation is brought down without a severe recession, then that is “really good news for the rest of the world,” Ms.Neiss said.
It also eases global financial conditions and reduces pressure on currencies that were taking a hit from the dollar’s strength.Now, the dominant theme around the world is central banks lowering interest rates as inflation slows, falling within sight of their targets, and economic growth weakens.Still, policymakers have been cautious about moving too quickly and reigniting inflationary pressures.The Bank of Canada has cut rates three times since June.
Last week, the European Central Bank cut interest rates for the second time in three months.The Bank of England held rates steady on Thursday after cutting just once last month.Central banks in Norway and Sweden are also ex...