Monetary Policy Easing - Are We There Yet?
Following one the most aggressive hiking cycles in modern history, are we firmly on the path to dovish monetary policy?
The ECB became the first of the major advanced countries to commence its easing cycle, cutting rates by 25 bps last week. Following the cut the Euro held ground against the Dollar indicating that markets had fully priced-in the decision. The Bank stressed that though inflation remains sticky, recent data showed slower-than-expected price increases. Similarly, the Bank of Canada cut its interest rate by 25 bps with the decision being informed by better-than-expected disinflation and recent data showing inflation below the bank's 3% target in April.
This is not your typical rate cutting cycle however. Central banks are more likely to keep rates above pre-pandemic levels due to persistent (sticky) inflationary pressures. The view from the team at Blackrock is as follows:
"Even with anticipated rate cuts, we see policy rates in the U.S. and Europe settling at a far higher level than they were pre-pandemic. The reason: inflation. We don’t see euro area inflation falling below 2% as it did when central banks cut rates before 2020. That’s because we are in a world shaped by supply constraints – a reality ECB officials have acknowledged recently. Among those constraints are mega forces – structural shifts driving returns now and in the future – like geopolitical fragmentation, demographic divergence and the low-carbon transition. Those forces are also playing out in the U.S. As a result, we expect ongoing inflationary pressures and structurally lower growth than in the past across major economies. "