Central Banks to Shape Market Sentiment

Next Week’s Key Rate DecisionsNext week, the world’s central banks will take center stage as the Reserve Bank of Australia (RBA), the Bank of Canada (BoC), the Swiss National Bank (SNB), and the European Central Bank (ECB) prepare to announce their monetary policy decisions. Let’s explore the expectations and potential implications of these highly anticipated meetings.

RBA Expected to Hold Steady Amid Weak Growth and Persistent InflationAustralia’s major banks largely agree that the Reserve Bank of Australia (RBA) will maintain its cash rate at 4.35% during its meeting on December 9-10, 2024. Despite financial markets pricing in rate cuts by early to mid-2025, uncertainty clouds the timing and extent of monetary easing.

The RBA’s own projections suggest that rate reductions may not commence until mid-2025. However, if inflation proves stubborn, interest rates could remain elevated longer than anticipated, prolonging challenges for households and businesses.

Economic Growth Hits a WallThirteen consecutive rate hikes have taken a heavy toll on Australia’s economy. GDP grew by just 0.3% in the September quarter, dragging annual growth down to a dismal 0.8%—a sharp decline from 1.0% in the June quarter. To put this in perspective, the country’s long-term average annual growth rate from 1990 to 2020 was 3%.

Even the RBA underestimated the slowdown. In November, it projected annual growth would rise from 1.0% in June to 1.5% by December. Instead, growth faltered, underscoring the fragility of the economy and prompting economists to revise their outlook for rate cuts.

Diverging Views Among Major Australian BanksAustralian banks have differing opinions on when the RBA will begin easing rates:

ANZ: Revised its forecast to two rate cuts in 2025, with the first in May and the second in August, bringing the cash rate to 3.85%.Commonwealth Bank: Maintains its prediction of a February 2025 rate cut, citing weak economic data from the Australian Bureau of Statistics.NAB: Expects the RBA to hold rates until May 2025, aligning with broader concerns about historically low growth levels.Westpac: Adjusted its forecast to predict the first rate cut in May 2025, with additional reductions in late May and July.What to ExpectFor now, the RBA remains in “wait-and-see” mode. Sticky inflation could push rate cuts further into the future, while weaker growth or a sharper-than-expected inflation decline might force earlier action. Financial markets are signaling mid-2025 as the likely starting point for easing, with rapid cuts possible once the cycle begins.

BoC’s Final Decision of 2024: Cautious or Aggressive Rate Cut?The Bank of Canada (BoC) faces a key decision as it concludes its 2024 monetary policy. Economists are split between a moderate 25-basis-point (bps) cut and a more aggressive 50-bps reduction.

GDP Growth Signals SlowdownCanada’s economy grew by 0.3% in Q3, a slight deceleration from earlier quarters. While growth was supported by household and government spending, it was offset by declining business investment, slower inventory accumulation, and reduced exports. This mixed performance casts doubt on the BoC’s earlier projection of 2% Q4 growth.

Diverging Analyst ExpectationsCIBC and RBC: Advocate for a 50-bps cut, citing weak GDP data and the need to address economic headwinds.Scotiabank and TD: Favor a smaller 25-bps reduction, highlighting domestic demand’s resilience and cautioning against overreacting to mixed data.

What to ExpectThe December decision will hinge on upcoming labor market data. A larger cut would signal urgency in addressing economic challenges, while a smaller reduction would reflect caution, especially if employment data shows resilience.

SNB Likely to Extend Easing Amid Slowing GrowthThe Swiss National Bank (SNB) is widely expected to cut its policy rate for the fourth consecutive time at its December 12 meeting. Following September’s 25-bps cut to 1.0%, the SNB has signaled further easing to counter slowing growth and deflation risks.

Inflation Under ControlSwiss inflation rose to 0.7% year-on-year in November, slightly above October’s 0.6% but well within the SNB’s 0-2% target range. A strong Swiss franc continues to deflate import prices, easing inflationary pressures.

Economic Headwinds PersistSwitzerland’s export-reliant economy faces significant challenges due to weak demand in key European markets like France and Germany. Coupled with subdued domestic growth, these factors support the case for additional easing.

What to ExpectEconomists anticipate a 25-bps cut in December, bringing the rate to 0.75%, with further reductions to 0.5% expected by March 2025. The SNB has also reiterated that negative rates remain an option if needed to maintain price stability.

ECB Faces Fourth Rate Cut Despite Geopolitical RisksThe European Central Bank (ECB) is expected to continue its easing cycle with a 25-bps cut at its December 12 meeting. However, geopolitical uncertainties and diverging opinions within the Governing Council complicate the longer-term outlook.

A Consensus on CautionECB policymakers like Olli Rehn and Martins Kazaks advocate for continued easing to support the eurozone economy. Yet, Bundesbank President Joachim Nagel has warned against moving too aggressively, citing uncertainties around global trade and political risks.

Gradual Easing and Market ExpectationsInvestors expect rate cuts at every meeting through mid-2025, potentially bringing the deposit rate down from 3.75% to 1.75%. Policymakers, however, emphasize gradualism, favoring smaller, incremental moves to avoid overshooting inflation targets.

What to ExpectA December cut appears certain, but the pace of future easing will depend on inflation data, geopolitical developments, and economic conditions. The ECB remains committed to supporting growth while guarding against inflation risks.

Conclusion: Central Banks at a CrossroadsNext week’s rate decisions will underscore the challenges central banks face in navigating fragile growth, moderating inflation, and global uncertainties. Whether maintaining caution or taking bolder action, their policies will significantly shape market sentiment and economic trajectories heading into 2025.