By Craig Stirling
From Washington to Frankfurt to London and beyond, central bankers are approaching their final decisions of the year against a backdrop of unease at how the global inflation cycle is turning.
Policymakers from fully half of the Group of 10 jurisdictions of most-traded currencies are scheduled to meet in the coming days, and interest rates for 60 per cent of the world economy will be set in a whirlwind 60-hour window.
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With the exception of Norway, which may conceivably raise borrowing costs, most monetary officials are confronting financial-market pressure to explain why they seem unhurried about pivoting to monetary easing.
In Latin America, which led the push upwards with rate hikes, most central banks are already on the way down, and Brazil and Peru may both cut in the coming week.
Their peers in the US and Europe aren’t so sure. After starting the year with renewed vigor to aggressively ramp up borrowing costs, they’re ending 2023 with more hesitation — setting the scene for what could become a prolonged standoff with investors.
“Central bankers are saying, ‘look, we’re waiting to see if what we’re seeing on this disinflation is sustainable,’” Joyce Chang, chair of global research at JPMorgan, told Bloomberg Television. “We think you’re not looking to see cuts until the second half of the year.”
Federal Reserve
The Fed is widely expected to keep its benchmark rate at the highest level in two decades as policymakers assess the lagged impact of their aggressive series of hikes since early 2022.
As central bankers gather Tuesday to begin two days of deliberations, they’ll have fresh inflation data in hand. The core consumer price index is seen reinforcing expectations that Chair Jerome Powell, at his press conference the following day, will acknowledge both the progress made on inflation as well as the risks of stubborn price pressures.
The core CPI for November, which excludes food and fuel for a better snapshot of underlying inflation, is projected to climb 0.3 per cent from a month earlier, when it rose 0.2 per cent. Compared with a year ago, forecasters see a 4 per cent advance that indicates that inflation is abating only gradually.
The inflation figures follow Friday’s solid labor-market report that showed healthy growth in employment and wages, along with a decline in the jobless rate.
Nonetheless, there are indications demand across the economy is cooling as the year draws to a close. November retail sales data on Thursday are expected to reveal consumers are becoming more guarded.
At the end of the week, industrial production figures are seen showing a partial rebound in factory output as striking auto workers returned to assembly lines.
What Bloomberg Economics Says
“There’s no incentive for the Fed to sound too eager to cut rates, lest financial conditions loosen further. While the December FOMC meeting may not move all the way to endorse the bond market’s pricing of sharp rate cuts next year, we think it will meet them about halfway.”
—Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists
European Central Bank
President Christine Lagarde will probably try to temper market expectations that price in a quarter-point European Central Bank rate cut in April.
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Executive Board member Isabel Schnabel has called the inflation slowdown so far “remarkable,” and said that further rate hikes are now unlikely. But she hasn’t pivoted much further. One colleague, Peter Kazimir of Slovakia, termed expectations for a rate cut in the first quarter of 2024 “science fiction.”
Lagarde will present new forecasts, accompanied by a collective view on the risks to growth and inflation, that will likely be a central component of the ECB’s messaging to counter market speculation.
What Bloomberg Economics Says:
“Given the risks around the inflation outlook, the ECB is probably unhappy with interest-rate swaps pricing in a rate cut in March. Lagarde may make that clear in the press conference. Our view remains that the first cut will come in June and the risks are skewed toward earlier action.”
— David Powell
Bank of England
The Bank of England is expected to keep rates on hold for a third straight meeting and deliver a warning that the fight against inflation is far from over.
![Image: Bloomberg Image: Bloomberg](https://bsmedia.business-standard.com/_media/bs/img/article/2023-12/10/full/1702178256-7562.jpg?im=Resize=(640,480))
However, officials are likely to repeat their guidance that policy needs to remain restrictive for an “extended” period to stop inflation from sticking above their 2 per cent target amid a still-tight labor market and price pressures in the services sector. The BOE announces its decision at noon on Thursday.
What Bloomberg Economics Says:
“We expect the BOE to double down on its message that policy is likely to remain restrictive for an extended period of time — services inflation is too high and there are tentative signs the economy may have regathered some momentum in the fourth quarter. There is still a long way to go on the road to 2 per cent inflation.”
—Dan Hanson and Ana Andrade
Switzerland
Swiss inflation is even weaker than in the neighboring euro zone — in fact, it has now declined to well below the 2 per cent ceiling targeted by policymakers.
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Even so, with Switzerland’s economy growing only feebly, officials will still face questions on the prospect of a reduction in borrowing costs in due course when they reveal their latest decision on Thursday.
Norway
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Stagnation is anticipated for the current quarter before a contraction at the start of 2024, as businesses encounter more spare capacity and fewer hiring problems, a key sentiment survey by the central bank showed this week.
Meanwhile, building activity is falling sharply and retail activity is slowing, even as Norway’s fossil-fuel sector cushions some of the fallout from stubbornly high inflation and rising credit costs. The Norges Bank decision comes Thursday.
Russia
Brazil
True to repeated signaling, Brazil’s central bank, led by Roberto Campos Neto, can be expected to deliver a fourth-straight half-point rate cut on Wednesday, to 11.75 per cent.
A cooling economy and inflation that’s slowed back to within the central bank’s target range is widely expected to keep Banco Central do Brasil on that pace through the first quarter of 2024.
![Image: Bloomberg Image: Bloomberg](https://bsmedia.business-standard.com/_media/bs/img/article/2023-12/10/full/1702178524-9875.jpg?im=Resize=(640,480))
Mexico
In Mexico, where Banxico typically doesn’t go in for dovish surprises, expect a unanimous decision on Thursday to keep the key rate at a record 11.25 per cent for a sixth straight meeting.
Looking ahead, slowing core inflation and a cooling services component now have Governor Victoria Rodriguez saying that the rate-cut discussion could begin in early 2024. The consensus among analysts is for an easing cycle to begin in the first quarter.
Peru
Also on Thursday, Banco Central de Reserva del Perú’s December meeting finds the economy in recession and riding consecutive months of deflation, possibly making a case for a 50 basis-point reduction after three straight quarter-point cuts.
Still, upside risks to inflation from El Niño-related disruptions and ongoing political turmoil will likely see veteran bank chief Julio Velarde stay the course and lower the key rate to 6.75 per cent from 7 per cent.