Global central banks have begun their monetary policy easing cycles. However, the differing characteristics of each economy’s inflation and growth path will dictate the pace and magnitude of easing .

Despite the Federal Reserve’s (Fed) slightly larger cut at the start of its monetary rate-cutting cycle in September, future policy decisions will be guided by evolving economic conditions, particularly in the labor market. Incoming data suggests the labor market is on a stable footing, reducing the likelihood of a deeper-than-expected rate-cutting cycle.

In Europe, however, a series of downward data surprises has raised concerns over the health of the economy, prompting expectations of a deeper and faster easing cycle by the European Central Bank (ECB) despite persistent stickiness in services inflation. With the disinflationary process on track, however, the ECB can address the weaker growth environment and continue to adjust monetary policy settings accordingly.

Given the drastically different growth backdrops, we see a higher risk of dovish surprises from the ECB compared with the Fed. Meanwhile, the Bank of Japan is likely to raise the policy rate gradually as rising wage costs are increasingly affecting services price inflation.

Earlier in 2024, shifting expectations for the Fed’s rate cuts and a strong U.S. dollar (USD) prompted emerging market (EM) central banks to balance financial stability, growth and inflation. With the Fed rate-cutting cycle underway, concerns about financial stability linked to weaker currencies have lessened. This has allowed EM central banks to focus on domestic conditions. With supporting structural growth factors, the level of monetary policy easing by Asian EM economies is expected to be less than the U.S.

Still, the trajectory of the central banks’ policy easing could be challenged by factors such as a severe U.S. growth shock or trade policy changes that may slow the global goods cycle. These shocks could affect developed and emerging economies differently, leading to varied interest-rate-cutting cycles globally. This, in turn, can present investors with a wider range of opportunities for global rates allocation.

The chart illustrates market expectations for future policy rates in the G4 economies, based on overnight index swap rates.
Exhibit 2: Market expectations* for central bank policy rates

Source: Bank of England, Bank of Japan, European Central Bank, U.S. Federal Reserve, J.P. Morgan Asset Management; Bloomberg L.P. *Expectations are based on overnight index swap rates. Past performance is not a reliable indicator of current and future results.
Guide to the Markets – Asia. Data reflect most recently available as of 19/11/24.