Key Focus This Week: U.S. CPI & Euro Area and Australia Monetary Policy

Global Monetary Policy Outlook for 6 Major Economies (Dec 2024)

As major global economies adjust their interest rate policies, financial markets continue to focus on central banks' monetary policy directions. From the Federal Reserve's gradual rate cuts to China's multiple rounds of easing measures, and the contrasting policy stances of Japan and Australia, the challenge of balancing inflation and economic growth remains prominent. United States Amid soaring inflation, the Federal Reserve raised the federal funds rate to a 40-year high during 2022-2023 to curb price increases. With restrictive rates exerting downward pressure on the economy, inflation gradually declined, and the risk of labor market deterioration intensified, prompting the Fed to initiate rate cuts in September. The federal funds rate has since decreased by 75 basis points (bps) from 5.25%-5.50% to 4.50%-4.75%. As the labor market conditions have improved since September and core services inflation remains sticky, the Fed noted in its November minutes that a gradual shift toward a more neutral policy stance could be reasonable if inflation and employment align with expectations. Markets anticipate another 25 bps rate cut in December but project the 2025 rate cut path may narrow to 50-75 bps, down from the previous forecast of 100 bps in September. Read more at Datatrack   China Following property market reforms in 2021 that led to a sharp decline in housing prices, domestic consumption and investment plummeted, plunging China into a deflationary crisis. In response, China resumed rate cuts in July and implemented further monetary measures such as reserve requirement and rate reductions in September to bolster economic growth. The one-year loan prime rate (LPR) has dropped by 35 bps from 3.45% to 3.1%. While recent fiscal and monetary stimulus measures have shown preliminary improvements in retail sales, industrial production, and PMI data, the real estate sector—China's economic backbone—remains weak. Markets expect the People's Bank of China to cut rates by another 25-50 bps in December and introduce additional fiscal stimulus next year. Read more at Datatrack   Japan Prolonged yen depreciation led to imported inflation, which, combined with the strongest spring wage hikes in 30 years, prompted the Bank of Japan (BOJ) to raise rates by 10 bps in March. This move ended eight years of negative interest rates and terminated yield curve control (YCC). The BOJ's benchmark rate has risen by 35 bps, from -0.1% to 0.25%. However, with core inflation above the BOJ’s 2.0% target and real wage growth turning negative after a brief recovery in mid-2023, markets expect another 25 bps rate hike in December or January 2025. Read more at Datatrack   Eurozone & Canada The European Central Bank (ECB) raised rates by 450 bps during 2022-2023 to combat inflation. Although this has significantly reduced inflation, the Eurozone's economic growth lacks the resilience seen in the U.S. As inflation nears the 2% target, the ECB preempted the Federal Reserve by initiating rate cuts in June. The main refinancing rate has decreased by 75 bps from 4.5% to 3.75%, with another 25 bps cut expected in December due to persistent economic weakness. Read more at Datatrack   In Canada, similar trends are evident, with the added risk of deflation. The Bank of Canada has reduced its policy rate by 125 bps since June, bringing it to 3.75%. Markets expect another 25 bps cut in December to counter ongoing economic sluggishness. Read more at Datatrack   Australia Unlike other advanced economies, Australia has maintained its rates despite a sharp decline in inflation, citing potential upide risks to inflation. This makes Australia the only major economy that has yet to begin rate cuts. Markets anticipate the Reserve Bank of Australia will keep rates steady in December, with the first rate cut likely deferred to April 2024. Read more at Datatrack   Global monetary policies have diverged significantly as inflationary pressures ease. The U.S. may adopt gradual rate cuts as labor markets stabilize, while Europe and Canada accelerate their easing in response to economic stagnation. China continues its efforts to stabilize growth through rate cuts and fiscal measures amid a weak property sector. Meanwhile, Japan and Australia take contrasting approaches. Japan focuses on tightening monetary policy to normalize rates, driven by wage growth and inflation concerns, while Australia remains on hold, prioritizing inflation management over easing.