- \n
- In the last round of meetings, most central banks hinted at rate cuts this year but all continued to push back discussions for an imminent move, stressing the need for patience before inflation sustainably returns to target rates.<\/li>\n
- We maintain our view that the Bank of Canada and Federal Reserve will start easing in June, and now also expect the European Central Bank to cut rates in June, followed by the Bank of England in Q3 and the Reserve Bank of Australia in Q4 this year.<\/li>\n
- Topic in focus:<\/u><\/strong> How will the rest of this current rate cycle from the BoC compare with previous ones? In short, we expect more things to differ than to stay the same.<\/li>\n<\/ul>\n
Expectations for first cuts gather around mid-year<\/h2>\n
Central banks kicked off the first round of policy meetings in 2024 by reinforcing that additional interest rate hikes won\u2019t (likely) be necessary, while at the same time stressing that it\u2019s too early to pivot to outright rate cuts. All opted to hold rates steady and, for the first time since 2022, did so without an explicit hiking bias. While inflation readings have broadly been moving lower, we continue to expect patience from the central banks, and anticipate the ECB, BoC, and Fed to all make that first cut in Q2 (June) with the BOE to follow in Q3 (August).<\/p>\n
To borrow Chair Powell\u2019s words, global central banks are currently in a \u201crisk management mode,\u201d balancing between inflation and downside economic risks. Those downside risks have also been receding, leaving more room for central banks to stay idle at peak policy rates for longer. The U.S. economy continues to surprise significantly on the upside without a reacceleration in inflation to-date. And purchasing managers’ indices suggest demand in the Euro Area and the UK may already have bottomed. Equity markets have climbed to new highs on persistent resilience in the US economy, and the U.S. dollar has remained strong.<\/p>\n
Central bank bias<\/h3>\n
<\/p>\n
\n<\/p>\n
\n\nCentral Bank<\/p>\n<\/div>\n
\nCurrent Policy Rate
\n(Latest Move)<\/p>\n<\/div>\n\nNext move<\/p>\n<\/div>\n<\/div>\n
\n<\/p>\n
\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_Canada-Flag.png\")
BoC<\/p>\n<\/div>\n\n5.00%
\n+0 bps in Jan-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nThe BoC maintained its rates pause for a fourth policy decision in January while dropping language around its readiness to move rates higher if needed. Lack of \u201csustained declines\u201d in core inflation measures was mentioned but the bank\u2019s estimate of a negative output gap by the end of 2023 suggests inflation should ease further. We look for the BoC to make a first cut in the overnight rate in June.<\/div>\n<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_US-Flag.png\")
Fed<\/p>\n<\/div>\n\n5.25-5.50%
\n+0 bps in Jan-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nThe Fed held the fed funds range unchanged at its January meeting while noting risks to its inflation and employment goals “are moving into better balance.” Chair Powell confirmed members\u2019 desire to move rates lower this year but pushed back firmly against a move in March, calling it unlikely. We continue to expect a first cut in June.<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_British-Flag.png\")
BoE<\/p>\n<\/div>\n\n5.25%
\n+0 bps in Feb-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nThe BoE held the bank rate unchanged in January, dropped a hiking bias along with its messaging of \u201chigh for long.\u201d Still, the tone was more cautious than that of the Fed or ECB with Governor Andrew Bailey noting upside risks to their forecast. We expect the BoE to start cutting rates in August.<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_EU-flag.png\")
ECB<\/p>\n<\/div>\n\n4.00%
\n+0 bps in Jan-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nThe ECB left the deposit rate unchanged in its January meeting alongside a significant dovish tilt. President Christine Lagarde highlighted slowing in wage growth and stood firmly by her earlier comments on a first rate cut likely happening before the summer. We now expect a first cut from the ECB to happen in June. <\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_Australia-flag.png\")
RBA<\/p>\n<\/div>\n\n4.35%
\n+0 bps in Feb-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nThe RBA held rates steady in its February meeting. It was in line with expectations, especially after a downside inflation surprise in Q4. The inflation readings were still above target but also showed more improvements in pressures that are tied to domestic demand. We now expect the RBA to start cutting rates in Q4. <\/div>\n<\/div>\n<\/p>\n
How will this rate cycle compare to prior ones?<\/h2>\n
Let\u2019s start with similarities<\/h3>\n
1. Duration of peak interest rate<\/strong><\/p>\n
The last rate hikes from the BoC and Fed were in July 2023. The expectation for the first cut to come around summer this year means both central banks will have been maintaining peak levels of key rates for just under a year. That\u2019s within the range of historical precedents.<\/p>\n
Over the course of the start of inflation targeting in Canada in 1991 to the onset of the pandemic in 2020, the overnight rate has, generally, been shifting lower from cycle to cycle. It\u2019s seen less movement overall and was held at peak levels for longer periods. More recently, the overnight rate was held at 1.75% for 17 months before the pandemic led to cuts in March 2020. Historical trends look very similar for the Fed, which held the peak level of Fed funds range for periods ranging from six to 18 months in cycles since the 1990s.<\/p>\n
2. BoC and Fed\u2019s independent monetary policy turning into similar paths<\/strong><\/p>\n
The BoC is an independent central bank and bases decisions on domestic economic conditions instead of mirroring the Fed\u2019s actions. The central bank hiked rates in 2010 upon a faster rebound in the Canadian economy from the global financial crisis, when the Fed chose to remain on hold. The gap between the Fed funds target rate and the BoC\u2019s overnight rate has grown to as wide as 250 basis points over the last three decades.<\/p>\n