On June 6, 2024, the ECB’s interest rate meeting took a decision to cut the main refinancing rate, the marginal lending rate and the deposit facility rate by 25 basis points to 4.25%, 4.5% and 3.75%, respectively. It was the first rate cut since the ECB adjusted its benchmark rate to a record high of 4.5% last September, marking the end of the ECB’s rate hiking cycle that began in July 2022. All three major European equity indices (FTSE London, CAC 40 Paris, and DAX Frankfurt, Germany) rose after the news of the rate cut.

Data released by Eurostat showed that inflation in the eurozone stood at 2.6% in May, the first rise in the year. Bank of Italy Governor Fabio Panetta said the rise in inflation was “neither good nor bad”. Bank of Portugal Governor Mário Centeno said the rise in inflation “did not significantly overshoot” expectations. The pace of further rate cuts will depend on the path of underlying inflation and the level of demand, said Philip Lan, the ECB’s chief economist. The combination of trade protectionism, isolationism and frequent geopolitical conflicts has led to a sustained slowdown in global economic growth.

The IMF’s forecast data in the World Economic Outlook Report released in April this year shows that the global economic growth rate in 2024 will be 3.2%. While the value is higher than the IMF’s January forecast of 3.1%, it is still well below the historical average before the epidemic. The eurozone economy is characterized by a strong external dependence on key energy sources, a high degree of foreign trade dependence, and strong capital market linkages with other major global capital markets. External political and economic factors, represented by the United States, have generated overlapping shocks that have severely impacted the eurozone economy, affecting many of the eurozone’s key economic indicators and placing the region under greater pressure to grow.

In December 2023, the euro area exported goods to the rest of the world for approximately €218.7 billion, a decrease of 8.8% compared to the value for the same period in 2022. Against this grim economic backdrop, the ECB needs a more flexible monetary policy. Interest rate cuts are conducive to the ECB’s ability to reduce the spread between the euro area and other major economies, and to enhance the economic resilience and competitiveness of the euro area. From January 2021, the euro area ended deflation, driven by the recovery from the epidemic and higher global supply and energy prices. The outbreak of the Ukrainian crisis has exacerbated inflationary pressures in the euro area. From February 2022 to June 2022, the original phase-in inflation target set by the ECB was 2%. However, the month-on-month CPI growth rate in the Eurozone increased from 5.9% to 8.7%, well above the expected inflation target. From July 2022, the euro area started a cycle of interest rate hikes, exiting negative interest rates that had lasted eight years in response to persistently high price levels. In less than two years, the ECB raised the marginal lending facility rate, the marginal deposit facility rate and the main refinancing rate to higher rates of 4.75%, 4.00% and 4.50%, respectively.

Month-on-month CPI growth in the Eurozone peaks in October 2022 before beginning a volatile decline. In May 2024, the month-on-month CPI growth rate in the euro area fell back to a level of 2.6%, gradually approaching the 2% inflation target set by the ECB. Although the European Central Bank rate hike inflation target is close to completion, but the rate hike brought about by the negative effects of the suppression of economic growth but also plagued the European people for a long time. In terms of economic growth, the Eurozone’s CPI grew at a mere 0.1% year-on-year in the first quarter of 2024, well below that of major economies such as the United States. From the third quarter of 2022 to the second quarter of 2024, the volatility of the economic sentiment index in the euro area declines and remains at a low level. In terms of credit data, the ECB’s Survey of Bank Lending in the Euro Area for the first quarter of 2024 showed a further narrowing of credit limits for corporate lending by euro area banks and a continued sharp decline in corporate demand for net lending to commercial banks. High interest rates in the top four countries of the eurozone, Germany, France, Italy and the Dutch banks, and a significant reduction in fixed investment have been the main reasons for the decline. It’s time for the ECB to start a new easing cycle.

From the economic performance of the eurozone, this ECB has enough sufficient conditions for a rate cut. On the economic growth front, despite the ECB having made its first round of rate cuts in June, eurozone GDP growth slowed in the second quarter, with year-on-year CPI growth in August a new mid-phase low. Eurozone inflation slowed to a three-year low of 2.2% in August, down from 2.6% in July. In addition, the eurozone’s main country, Germany’s economic slowdown and industrial output fell also triggered the market to the eurozone economy after a short period of growth slowdown concerns. The ECB has this round lowered its June forecast for the eurozone economy, predicting that the eurozone economy will grow by 0.8% in 2024, and “the forecast for 2025 has been revised downwards to 1.3% from 1.4% on the grounds of a weaker contribution from domestic demand in the coming quarters”, before rising to 1.5% in 2026. This is mainly due to weakening demand within the Eurozone over the next few quarters. On the inflation front, the ECB said that recent inflation data were broadly in line with expectations. In order to achieve the medium-term target of 2% inflation, this rate cut aims to make monetary policy in the euro area less restrictive and promote economic growth. Referring to the ECB’s 2% inflation target, Lagarde said recent data “gives us confidence that we are moving towards our goal,” the Financial Times reported. The ECB forecasts average headline inflation of 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. The sharp drop in energy prices is no longer included in the annualized rate calculation resulting in a renewed rise in inflation in the second half of the year. The rate cut is expected to ease the pressure on consumers and businesses, and will have a positive impact on boosting the continent’s economic recovery. The ECB said Thursday that “labor cost pressures are moderating and profits are partially cushioning the impact of wage increases on inflation.” The Financial Times reports Martin Wolburg, an economist at Generali Investments, as saying, “They are more confident about inflation and can see falling company margins absorbing high wage growth.”

Interest rate cuts are not only an important monetary policy control tool, but also an important economic signal. Interest rate cuts by the Federal Reserve and the European Central Bank have a “demonstration effect” on other central banks. On September 25, the Riksbank cut its benchmark interest rate for the third time this year following May and August, all by 25 basis points. The Riksbank has gradually eased monetary policy by lowering its policy rate and has indicated that it can expect further cuts. The Riksbank has indicated that it may continue to cut interest rates at its monetary policy meetings in November and December this year, noting that “one of these meetings could result in a cut of 50 basis points” and that “the reduction in the policy rate is expected to be significantly faster than previously expected.” Policy rate forecasts suggest that there may even be a 50 basis point cut at an upcoming meeting.

Sweden’s economic development has largely stagnated over the past almost three years. The Riksbank said, “The recovery seems to have been somewhat slower than expected. Strengthening economic activity is important in itself, but it is also a necessary condition for inflation to stabilize close to the target.” The Riksbank expects low and stable inflation as well as lower interest rates to contribute to the economic recovery. Compared to the June 2024 Monetary Policy Report, the Riksbank has adjusted its forecasts on numerous indicators. On the CPI, the Riksbank lowered its forecast for 2024 from 3.1 to 2.7, lowered its forecast for 2025 from 1.3 to 0.4, and raised its forecast for 2026 from 1.6 to 1.7, according to Statistics Sweden and the Riksbank. For CPIF, the Riksbank lowered its forecast for 2024 from 2 to 1.7 and for 2025 from 1.8 to 1.6, maintaining its forecast for 2026. On GDP, the Riksbank lowered its forecast for 2024 from 1.1 to 0.8, raised its forecast for 2025 from 1.7 to 1.9, and raised its forecast for 2026 from 2.4 to 2.5. On the unemployment percentage, the Riksbank reduced its forecast for 2024 from 8.5 to 8.4, increased its forecast for 2025 from 8.3 to 8.4, and maintained its forecast for 2026. In terms of policy rate percentages, the Riksbank maintained its forecast for 2024, reducing its forecast for 2025 from 2.9 to 2.4 and its forecast for 2026 from 2.7 to 2.3. On policy rates, the Riksbank lowered its forecasts from the second half of 2024 and the first half of 2025 compared to the June Monetary Policy Report.

There are a number of reasons behind the Riksbank’s decision to cut interest rates again in September. The Riksbank said that “the balance of risks to the outlook for inflation and economic activity in Sweden has shifted markedly in the last two years. The risk of excessive inflation has gradually declined.” In terms of economic development, Sweden’s economy has weakened more than expected, according to an analysis by brokerage firm China. Sweden’s gross domestic product fell 0.8 percent in the second quarter of 2024 from a year earlier, the biggest decline since the fourth quarter of 2022, data from Statistics Sweden showed. The decline was well below market expectations. On the inflation front, Sweden’s CPIF measure slowed further to 1.2% in August, below market expectations of 1.3%. The indicator is at its lowest level since December 2020. Statistics Sweden said the main reason for the slowdown in inflation was the decline in energy, food, travel and gasoline prices. SEB economist Robert Bergqvist warned that “the warning lights are now starting to go on for too low inflation.” But he further analyzed that “it is too early for the Riksbank to think that Sweden is already under deflationary pressure.” In terms of employment, Swedish labor market statistics show that unemployment is on the rise in Sweden. In analyzing the reasons for the rate cut, brokerage firm China specifically mentioned the real estate sector. The Riksbank has previously stated that real estate risks are mainly risks at the operational level of real estate companies, “which means that the risk of a possible increase in loan losses in the banking sector remains.” With the increase in bond issuance by real estate companies, liquidity pressure was gradually eased. Overall financing conditions in Sweden have improved. Real estate bonds sold by Swedish real estate companies in the first three quarters of this year have already increased compared to full-year issuance in 2023. The Riksbank’s act of lowering interest rates in this context is seen as a stimulus to the economy. The Riksbank said that “on balance, these changes imply a relatively large shift in monetary policy in a more expansionary direction, which will improve household finances and make it easier for companies to invest.” James Pomeroy, global economist at HSBC, said, “The rapid adjustment in policy rates should help boost consumer spending power and potentially accelerate the pace of business investment, moving the Swedish economy from very weak growth to more favorable conditions.”

While several central banks have opted to cut rates, the Bank of Japan has been a unique presence in this rate-cutting frenzy. Previously, the Bank of Japan made two rate hikes during March and July of this year. In March this year, the Bank of Japan raised the policy rate from -0.1% to 0 range to 0 to 0.1% range, is the first time since 2007 to raise interest rates, marking the Bank of Japan formally withdrew from the maintenance of the negative interest rates for eight years. In July, the Bank of Japan announced that it was adjusting its 0-0.1% policy rate to 0.25%. The news instantly impacted global markets, making the Bank of Japan a bit of an uncertainty in the financial markets. The rate hike triggered a record plunge in Japan’s stock market making the BOJ’s decision to raise rates more cautious. Stefan Angrick, senior economist at Moody’s Analytics, said the BOJ’s rate hike will likely be considered one of the most controversial.

On September 20, the Bank of Japan’s interest rate meeting announced that the yen exchange rate was maintained at 0.25%. Bank of Japan Governor Kazuo Ueda said this month that the depreciation of the yen had diminished the risk of price increases and that he still had time to consider raising interest rates. The potential impact of BOJ policy on the yen carry trade makes the BOJ’s monetary policy outlook as critical as that of the Federal Reserve’s, according to analysis by brokerage firms in China. The Bank of Japan in the September resolution statement deleted the July statement, “if the economic trend is in line with expectations will further raise interest rates”, said highly concerned about the impact of foreign exchange and financial market volatility. The Huatai Securities Research Institute analyzed in the report “The Bank of Japan stays put for now, but a rate hike is still possible in the future” that the overall dovishness of this interest rate meeting is despite the fact that Governor Kazuo Ueda retained the possibility of continuing to raise interest rates at the press conference. The report analyzes the rate meeting in terms of fundamentals, interest rate guidance and the medium to long term. In terms of economic fundamentals, Japan’s overall economic growth remains in line with the Bank of Japan’s expectations, the core CPI is relatively solid, and the reflationary process is expected to continue into fiscal year 2025. Kazuo Ueda said the easing of upside risks to inflation could be for reasons such as the appreciation of the yen. On interest rate guidance, Kazuo Ueda was open to a rate hike. Kazuo Ueda emphasized that the Bank of Japan will not make a decision to raise interest rates sooner for reasons such as the easing of upside risks to Japanese inflation, the rebound in the yen’s exchange rate, the economic outlook for the U.S., uncertainty in Japan’s financial markets and the cumulative impact of historical rate hikes as the policy rate moves closer to the neutral rate. BOJ member Naoki Tamura said Japan’s nominal neutral rate is at least around 1%. Medium and long-term development, Huatai Securities Research Institute emphasized that “although the process may have twists and turns, but the overall direction of the U.S. and Japan’s monetary policy ‘scissors’ is still inclined to narrow, or to produce certain spillover effects.”Japan’s endogenous inflation is hopefully sustained amid the risk of yen appreciation weakening imported inflation. Japan’s apparent CPI rose in August from July year-on-year, and nominal wage growth in June-July far exceeded the January-May value, “expected to support goods and services inflation.” On September 19, the Federal Reserve cut interest rates by 50 basis points, opening a new round of easing cycle. The report analyzes that the process of dollar-yen normalization will continue further in the case of the Fed and the Bank of Japan’s policy direction is opposite. The yen tends to appreciate on the premise that fluctuations in the yen exchange rate are relatively manageable.

With the sharp depreciation of the yen’s exchange rate this year, increased upward pressure on inflation, and the constant turmoil in the financial markets, the Japanese people are strongly dissatisfied with the performance of the incumbent Japanese Prime Minister Fumio Kishida and his Cabinet. Former prime ministerial favorite candidate, now Japan’s economic and security minister Sanae Takaichi strongly advocated maintaining an accommodative stance. As a staunch supporter of “Abe’s economics”, she opposes the tightening of macroeconomic policies and has broad support in Japan for the ultra-loose monetary policy promoted during Shinzo Abe’s tenure as prime minister. “Some people say the yen depreciation is bad, but the benefits of the yen depreciation are great.” She said, “This is an extremely important moment. Raising taxes, curbing fiscal spending and tightening monetary policy are all big no-nos.” However, Shigeru Ishiba, former LDP chief executive, was elected president of Japan’s Liberal Democratic Party, defeating Sanae Takaichi, and is expected to be chosen as the new Japanese prime minister on October 1st. Shigeru Ishiba, who is close to the current government’s economic policy ideas, is likely to support the Bank of Japan’s continued interest rate hikes and a continued gradual return to monetary policy normalization. The Bank of Japan’s next policy meeting will be held on October 30-31, when the policy board will also conduct a quarterly assessment of growth and inflation forecasts.

By Sun Weiffeng