Central banks started cutting interest rates months before the Fed
Central banks started cutting interest rates months before the Fed
The world is now well into an interest-rate cutting party, which promises to lower borrowing costs and support economic growth.
Following the U.S. Federal Reserve’s much-anticipated — and higher-than-some-expected — 50-basis point rate cut last Wednesday, other global central banks followed suit.
South Africa cut rates the next day for the first time in four years. Today, Sweden’s central bank cut rates, saying inflation has now fallen below the country’s official target. And the People’s Bank of China signaled a range of interest rates will be cut as part of an economic stimulus package to jumpstart growth.
But here’s the thing: Many central banks — including those in Europe, England, Canada and some emerging markets — were already cutting their benchmark rates, in some cases months before the Fed started down that path last week.
While the Fed may not the trend setter in this rate cutting cycle, the direction it’s setting still matters a lot for the global economy.
Cornell economist Eswar Prasad said the Fed’s recent move marks a significant shift in global finance.
“What the Fed does matters greatly to the rest of the world,” Prasad said. “U.S. interest rates are essentially a benchmark in other parts of the world, and also affect exchange rates in other countries.”
Prasad said as long as the U.S. kept its benchmark interest rate high — keeping the dollar strong and making the U.S. an attractive place to invest — it discouraged other countries from cutting rates too aggressively.
“It could make their imported goods more expensive, or it could have led to capital flowing out of their economies,” Prasad said.
Now, those calculations are changing, especially for economies closely tied to the U.S. through their exchange rates or trade, like Mexico and Canada, said Neil Shearing at Capital Economics.
“The fact the Fed is lowering interest rates means that if other central banks feel like they need to lower too, to give some support to their economies, well, it gives them a bit of cover,” Shearing said.
The European Central Bank began cutting rates back in June, getting out ahead of the Fed, said Jay Hatfield at Infrastructure Capital Advisors.
“The European economy is in a minor recession. They’d be in a major recession if they didn’t export to the U.S, so they have to cut.” Hatfield said.
The Europeans wrestled inflation down faster than the U.S., giving policymakers there more room to maneuver, said Jacob Kirkegaard at the Peterson Institute for International Economics.
He pointed out that European inflation was mainly driven by the spike in energy prices after Russia’s invasion of Ukraine.
“Europe’s dependency-slash-vulnerability to Russian energy exports are essentially gone, and the main reason for that is really conservation,” Kirkegaard said.
Europe is using less natural gas at the same time it’s boosted imports from the U.S., Australia and the Middle East.
A few economies around the world are actually bucking the rate-cutting trend. Japan, Brazil and Nigeria have all recently raised interest rates to fight resurgent inflation.
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