Will Japan and Switzerland Lead the Way on Monetary Policy Changes in 2024?

According to a CNBC report, financial analysts on Wall Street are considering which central bank will be the first to change its monetary policy trajectory — with the Bank of Japan (BoJ) and the Swiss National Bank (SNB) arriving first but moving in different directions. Before we have a closer look at what experts are expecting from both, let’s come back to this week’s monetary policy meeting.

No Changes From the RBNZ This Week

On February 28th, the Reserve Bank of New Zealand (RBNZ) decided to keep its monetary policy unchanged, holding interest rates steady at 5.5%. This move aims to tackle inflation levels that surpass its target range of 1-3%. According to Stats NZ, the Consumer Price Index (CPI) rose by 4.7% in the December 2023 quarter, following a 5.6% increase in the September 2023 quarter.

Despite recognizing a deceleration in economic activity, the RBNZ’s main priority continues to be inflation control. It expects inflation to peak in the first half of 2024, followed by a gradual decline, thanks to a slowdown in the global economy. The central bank anticipates that the cooling of the global economy this year will positively impact the country’s battle against inflation, especially in terms of imported inflation.

Imported inflation occurs when the prices of goods and services a country purchases from abroad increase (and when imports play a significant role in its economy, such as fuel and machinery in New-Zealand, for example). However, a slowing global economy might lead to less rapid price increases for those imported goods, which could assist in the global fight against inflation.

While the RBNZ’s decision was in line with most market expectations, some had predicted a more hawkish approach, with a few even expecting a rate hike. Nonetheless, it appears that the RBNZ is adopting a “wait and see” stance for the fourth consecutive time, consistent with the approach of most developed countries, now that interest rates are at their highest level in 15 years in the country.

The SNB Might Cut Interest Rates in March

In January, the SNB Chairman declared that the bank doesn’t need to increase interest rates further to maintain price stability, which means that investors are now trying to forecast when the next rate cut will happen.

Analysts anticipate that among the G10 central banks, the Swiss National Bank (SNB) is most likely to lower its interest rates to 1.5% as soon as March, with LSEG data suggesting a 60% probability of an initial reduction of 25 basis points next month. On the other hand, some analysts expect the SNB to wait a bit longer such as economists from UBS that argue that the SNB’s first-rate cut might be postponed until June, to ensure a more sustainable downward trend in prices.

Inflation in the country stood at 2.1% in 2023 and appears to be trending lower than the SNB’s December inflation forecast, which projected an average annual inflation of 1.9% for 2024 and 1.6% for 2025. In January 2024, inflation revealed downside surprises by easing to its lowest level since October 2021, with the annual inflation rate dipping to 1.3% from 1.7% in December.

The BoJ May Make Some Changes in April

While investors globally are speculating on when central banks will begin to lower interest rates following rapid hikes, Japan faces a unique situation, as the current monetary policy of the Bank of Japan (BoJ) aims to stimulate the economy and counter deflationary pressures using two principal strategies.

Firstly, the NIRP (or negative interest rate policy) imposes a 0.1% charge on banks for their deposits at the central bank. This policy encourages financial institutions to lend rather than accumulate funds, promoting increased lending to businesses and consumers. The objective is to invigorate economic activity, enhance spending, and foster inflation, thereby addressing deflationary concerns.

Secondly, the BoJ has implemented a policy known as Yield Curve Control (YCC) since 2016, focusing on controlling the yields of Japanese government bonds (JGBs), especially the 10-year bonds. YCC’s primary aim is to maintain short-term and long-term interest rates at levels the BoJ considers appropriate (around 0%) by purchasing or selling bonds on the markets. This strategy is designed to reduce borrowing costs for businesses and consumers, thus stimulating spending and investment to achieve the BoJ’s inflation target, encourage economic growth, and move away from deflation.

CNBC reports that Société Générale has recently suggested that Japan’s economic conditions are ripe for the BoJ to conclude its eight-year ultra-accommodative policy. With the country’s inflation rate stabilizing around 2%, the scenario of ultra-low inflation seems to be no longer viable, aligning closely with the BoJ’s target.

However, the country wants to ensure that inflation remains stable at approximately 2% before considering interest rate hikes and ending its monetary stimulus era. In its latest monetary policy statement from January, BoJ officials emphasized their intention to “the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions.”

Market participants are anticipating the BoJ’s initial adjustments in April, driven by increasing labor shortages expected to exert upward pressure on wages. The outcome of Japan’s annual wage negotiations (Shunto) will be closely monitored by investors and policymakers alike, as it will likely influence future spending and consumption patterns, as well as impact inflation trends.

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