Why Did Other Countries Cut Interest Rates This Week?

While American eyes were focused on the Federal Reserve this week, some of the U.S central bank’s counterparts in other countries began cutting interest rates.

After the Federal Reserve held its influential fed funds rate steady on Wednesday, central banks in Switzerland and Mexico announced rate cuts on Thursday.

Federal Reserve officials reiterated this week they need more confidence that inflation is moving sustainably toward its annual goal of 2% before cutting rates. And the U.S. isn’t the only country in a “wait-and-see” phase. The Bank of England also kept its interest rates unchanged this week.

And yet, some economies are dealing with a unique set of challenges, sending their monetary policy in the opposite direction. The Bank of Japan hiked its interest rates for the first time since 2007. This hike ended an era of negative interest rates, which central bankers in the country used to try to boost its stagnant economy.

Strategies Diverge as Inflation Eases

Monetary policy decisions across developed economies fell roughly in line during inflation’s run-up. However, as price increases have slowed, central bank strategies have started to diverge, according to Bank of America economists.

Inflation in Switzerland didn’t grow as rapidly as it did in the U.S. and England during the recovery from the pandemic-induced downturn. Inflation grew 2.1% last year in Switzerland, while prices increased 2.6% over the year in the U.S. and 4% in England.

The Swiss government also expects inflation will decline to 1.4% this year, while Wednesday’s Fed projections showed officials expect inflation to move down to 2.4% in the U.S. this year.

The Swiss National Bank also has taken a different approach during this inflationary period. While the Fed raised rates 5 percentage points over the course of roughly a year and a half, Switzerland raised rates 2.5 percentage points in a year. This will be the first cut the Swiss central bank has made in nine years.

Mexico, on the other hand, is an emerging market. Its quick action at the beginning of ballooning inflation makes it more akin to Brazil, wrote BMO Economist Douglas Porter in an analysis on Friday. Brazil’s central bank began hiking quickly and intensely in spring 2021, resulting in cuts starting last year.

“The emerging markets that sniffed out the inflation trouble early on, and responded accordingly, are now beginning to send out the almost-all-clear signal,” Porter wrote.

Despite not being at the forefront of rate cuts, U.S. markets are still convinced relief on interest rates will come this year. According to CME Group’s FedWatch Tool which forecasts rate movements based on fed funds futures trading data, there’s a 76% chance the Fed will cut rates at its June meeting. That’s up from a 65% chance forecast before the Fed’s decision this week.

“A notable aspect of the steadfast conviction that U.S. rates are coming down is that the economy, inflation, and financial conditions are hardly crying out for relief,” Porter wrote.