Are global central banks ready to cut rates?

Anthony Wu, CFA, Portfolio Manager, SLGI Asset Management, Inc.

The short answer is ”no”

As major central banks paused interest rate hikes in recent weeks, markets are expecting a rate cut cycle to begin by mid-2024. We believe this is premature for a few reasons. Inflation and economic data continue to exceed estimates in most developed countries. In Canada and the U.S., both inflation and economic data continue to land in the “hawkish surprise zone.” This means both growth and inflation data are stronger than expected, and if this trend continues, central banks may consider further monetary tightening by increasing interest rates.

Hawkishness is a central bank’s tendency to tighten monetary policy, whereas dovishness is the opposite - a central bank’s shift to loosen monetary policy.

Stagflation surprise - Growth surprises to the downside while inflation surprises to the upside.

Hawkish surprise - Both growth and inflation surprise to the upside.

Dovish surprise - Both growth and inflation surprise to the downside.

Optimum quadrant - Growth surprises to the upside and inflation surprises to the downside.

Inflation Surprise Index - Reported inflation vs. inflation estimates; Economic Surprise Index - Reported GDP vs. GDP estimates. Data as of November, 15, 2023.

Most central banks still sound “hawkish”

Speeches - Central bank officials’ speeches indicating whether interest rates can stay high (hawkish) or decrease (dovish).

Statements - Central banks’ statements indicating whether interest rates can stay high (hawkish) or decrease (dovish). Data as of November, 15, 2023

Our team leverages research from data providers that use large language models to analyze and convert text and speeches of various central bank communications into data to interpret central bank hawkishness or dovishness. According to this data, a score greater than zero means a hawkish stance and less than zero denotes a dovish stance. As the chart above shows, except for the Bank of Japan’s dovishness, all central banks are still maintaining a hawkish stance.

We think markets are wrong to assume rate cuts are coming sooner

Until both economic data and inflation data fall materially below expectations, we believe markets will continue to be wrong in their expectations for interest rate cuts in the U.S and Canada.

For the next few months, we will watch U.S. inflation numbers and employment data, which has been a surprisingly bright spot in the economy. We reiterate our view that interest rates will stay higher for a longer period as central banks continue their battle against inflation.

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