This week, we witnessed a pivotal moment in global financial markets, spurred by a series of central bank meetings around the world.
From the Federal Reserve’s updated economic projections to the Bank of England’s inflation response and the Bank of Japan’s historic rate hike, these developments collectively shaped investor sentiment, driving equity markets to notable gains and declining bond yields.
What You Will Learn
- Central bank meetings, especially from the US and UK, signalled potential rate cuts, influencing global markets.
- The Federal Reserve’s projections suggest a shift towards lower interest rates by 2024, alongside improved economic growth forecasts.
- The Bank of England maintained high borrowing costs but noted a positive economic direction influenced by slowing inflation.
- The Bank of Japan ended its negative rate policy, marking a significant shift in its monetary strategy, yet equities soared.
Fed’s Economic Outlook and Rate Projections
On Wednesday, the US Federal Reserve held its March Federal Open Market Committee (FOMC) meeting.
Also, it released an updated set of economic projections. The Fed left the fed funds rate on hold at 5.25% – 5.5%, but its updated dot plot still pointed to three rate cuts in 2024.
The FOMC also sees the fed funds rate gradually heading to around 3.1% by 2026, indicating that this year is likely the start of a multiyear rate-cutting cycle.
The Fed also took the opportunity to upgrade its economic growth outlook for 2024 – 2026.
Bank of England and Inflation Trends
A similar narrative was relayed in the UK on Thursday when the Bank of England’s rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25%. The two officials who had previously called for higher rates changed their stance.
Governor Andrew Bailey stated that the economy was ‘moving in the right direction.’
The rate announcement was based on data showing that annual consumer price growth decelerated to 3.4% in February from 4.0% in January.
Bank of Japan’s Policy Shift
In contrast, the Bank of Japan raised interest rates for the first time in 17 years, ending the world’s last remaining policy of negative rates.
The central bank increased rates to between 0% and 0.1% and scrapped its yield-curve control policy, a tool to control long-term bond yields.
Equity Markets Respond to Central Bank Moves
All major US equity indices posted returns of over 2% over the week following the dovish tone set by the Federal Reserve.
European equities also benefited from the sentiment, rising over 1%. In comparison, UK equities surged to 2.7% following the Bank of England’s rate announcement and subsequent weakening of the British Pound.
Despite the announcement of an increase in interest rates, Japanese equities rallied over 5% to reach new record highs.
Chinese equities fell around 1% following continued concerns about a slump in the country’s property sector.
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