Over the past two weeks, central banks in the United States, United Kingdom, euro area, and Japan have all held monetary policy meetings. The communications following these meetings retained a hawkish bias, suggesting further policy tightening may be necessary—except for the Bank of Japan (BOJ)—however, additional interest rate hikes will likely be much less frequent for the remainder of this cycle. Despite this reality, we do not think major central banks will be quick to cut interest rates next year.
- The Federal Reserve held its policy rate constant at 5.25%–5.50% but indicated in its summary of economic projections that interest rates would need to be held tighter relative to its last projection in June. For instance, the Fed now believes it will only cut interest rates by 50 basis points (bps) in 2024, relative to its prior projection of 100 bps in cuts, due to a stronger outlook for economic growth.
- The Bank of England held its benchmark policy rate unchanged (5.25%) for the first time in nearly two years in a finely balanced decision. The lower-than-anticipated inflation print for August, along with weak PMI and GDP reports, gave the central bank cover to pause rate hikes as those increases already delivered appear to be having a material impact on the UK economy.
- The European Central Bank increased its benchmark deposit rate 25 bps to 4.00%, its highest levels since the euro was created in 1999. However, the central bank cut its economic growth outlook and hinted that it is prepared to halt further rate increases with growth in the region seemingly on shaky foundations.
- The BOJ continued to stand apart from its peers, making no changes to its ultra-loose monetary policy and continuing to hold its benchmark rate at -0.1%—the only country in the world to maintain a negative target rate. BOJ Governor Kazuo Ueda noted that the central bank must “patiently maintain” this dovish stance until inflation sustainably reaches their 2% target, which they have yet to see.
For more information on government bonds, please see TJ Scavone,
“Don’t Count Out Government Bonds Just Yet,” Cambridge Associates LLC, June 2023.
The GBP, EUR, and JPY all sold off vis-à-vis the USD as the market priced in a slightly stronger economic and interest rate backdrop in the United States. Equity markets broadly retreated as investors reacted negatively to the announcements. Looking forward, we do not think investors should be short duration relative to their benchmarks, given the support it can provide to portfolios if economic activity slows more than expected. We believe the risks to high-quality government bonds are tilted toward yields moving lower over the next 12 months.
David Kautter
Associate Investment Director, Capital Markets Research
Thomas O’Mahony
Senior Investment Director, Capital Markets Research