Prospects for G10 monetary policy

The Fed’s next meeting will be in January 29th. The market is priced for no change in rates, and many analysts go along with this. The likely pause in the monetary easing is largely down to the fact that the Fed wants to see how the land lies after incoming president Trump lays out his policy agenda. For while some of this seems quite clear, such as making the 2017 temporary tax cuts permanent, other elements, such as tariffs, seem harder to nail down.

Will the Fed resume easing once there’s some clarity on these policies? That clearly depends, in part, on what these policies are as well as the general progression of the economy. According to the Standard Bank, the Fed can return to an easing frame of mind in the spring, and we look for the easing cycle to find a base around the 3.5% region, which would be a 1% point reduction on current levels. Just how soon the longer-end of the bond market might be able to start its likely path towards lower yields is a little harder to say.

Clearly one reason for this is that the Fed’s rate cuts to date have seen longer-term yields rise, not fall. This is unusual, and we don’t think it will persist over the long haul, but getting to the point when the ‘long haul’ kicks in is uncertain, and, in the meantime, the Standard Bank still believes that the 10-year Treasury yield could vault 5%.

Policy easing and yield declines appear better bets outside of the US, and especially in Europe. For while the Fed pauses in late January, we look for others, such as the ECB and the BoE, to deliver rate cuts at the same sort of time. A 25-bps rate cut from the ECB at the January 30th meeting seems like a good bet, but the Bank of England could be a tougher call.

For while there’s little doubt that the economy is languishing again, the hawks on the MPC will be casting a wary eye over the outlook for prices given that more and more firms report that they could be forced to lift prices because of the employer tax hikes in the budget and the increase in the minimum wage. These changes are not due until early April and hence part of the MPC’s decision on rates at the next meeting on February 6th will be whether inflation will spurt after April and potentially make any rate cuts now seem foolhardy.

The Standard Bank’s own view is that this prospect will not put off the bank, meaning that a 25-bps rate cut to 4.5% is the most likely outcome. This is partly because the paucity of growth will make it hard for firms to pass on cost increases and also because survey evidence pointing to potentially higher prices may partly reflect firms’ dissatisfaction with government policy rather than a sign that prices will inevitably rise at a faster pace. The market is largely priced for a rate cut in February but only sees one more ‘nailed-on’ rate cut after that this year. This bank thinks this is far too pessimistic given that we see at least four rate cuts in 2025.

Two central banks in the G10 region that have held out against rate cuts up to now should fold to the pressure soon, with both the Reserve Bank of Australia and Norges Bank looking set to cut rates in the next month, or two. This would leave all of G10 – bar the Bank of Japan – easing policy. The Bank of Japan seems set to lift the policy rate another 25-bps to 0.5% at its next meeting on January 24th . Its last hike, in August last year, sparked pandemonium in not just the domestic market but also internationality as the Bank had not clearly signalled that a cut was imminent beforehand.

The BoJ seems to have learned a lesson from this with last week’s slew of media stories quoting alleged'sources’ as saying that rates will likely rise this Friday, probably a sign that the BoJ has made efforts to let it be known that it will act to tighten policy this week. If that’s correct, a repeat of last August’s stock market meltdown should be avoided, while 10-year JGB yields should edge higher towards the Standard Bank’s target of 2%.