12/16/2024

The economic outlook for 2024 has been shaped by unforeseen political events and a major shift toward monetary easing by the world's leading central banks. In general, various monetary authorities have lowered interest rates as inflation rates have moved closer to their long-term targets. However, the extent of these measures has differed according to the economic conditions in each region. This week has been no exception, with central banks introducing some unexpected policy changes.

For example, the European Central Bank reduced interest rates by 25 basis points and adopted a more accommodative stance, removing its previous restrictive bias. Although it retained the option to adjust the speed of future rate cuts, it indicated that monetary policy is continuing to move towards easing. BBVA Research anticipates that the ECB will implement four more cuts in 2025, potentially bringing the deposit rate to 2.0% by the end of the year, contingent on inflation and economic growth trends.

In contrast, the Swiss National Bank surprised investors with an unexpected 50 basis point cut. The institution explained its decision based on inflation trends, which are nearing 0% year-on-year when excluding rents, and expressed a desire to stay ahead of the market to avoid having to reduce rates to negative levels again.

Meanwhile, China has clearly signalled a shift towards a more accommodative monetary policy. The People's Bank of China plans to lower interest rates and reduce the reserve requirement ratio to boost credit and consumption. However, aggressive rate adjustments are unlikely, as monetary authorities face constraints due to exchange rate fluctuations.

Overall, central banks' actions over the past week highlight the complex balance between stimulating economic growth and controlling inflation. Some have chosen bold measures to tackle immediate challenges, while others have opted for a more gradual and cautious approach. As the year comes to a close, the global outlook remains characterized by a delicate balance between economic risks and monetary policy priorities.

Central banks will remain in the spotlight this week with several key meetings in major economies and emerging markets. In the United States, all eyes will be on the Federal Reserve meeting. It is expected that the Fed will reduce the federal funds rate by 25 basis points, bringing it down to a range of 4.25% to 4.50%, aligning with market expectations. Despite recent data showing a resilient economy, with robust consumption growth and a strong labor market, Fed officials have indicated that future rate cuts will likely proceed at a slower pace. Moreover, the Committee's projections for 2025 are expected to show fewer rate cuts than anticipated in September, possibly only two or three more. This reflects a more cautious approach, given the persistent inflationary pressures in recent months.

In the United Kingdom, the Bank of England is likely to keep interest rates steady at 4.75%. Despite the disappointing recent economic data, the rate cut made in November is still fresh, and Committee members appear to prefer a quarterly pace for rate reductions. However, there are differing opinions, and some members might support another cut in December due to the increasing risks to the country's economic activity.

In Japan, the central bank faces a critical decision. While it is expected to maintain current rates, attention will be on its long-term monetary policy review. This could pave the way for a gradual normalization of interest rates by 2025.

Overall, this week will be key in evaluating the future direction of global monetary policy. Central banks seem to be taking different approaches: some are focused on maintaining a slow pace of change, while others are under pressure, both internally and externally, to adjust their policies more quickly.

In France's political scene, President Macron has appointed centrist François Bayrou as the new prime minister. Bayrou faces the challenge of forming a government that, at best, would rely on the support of a minority coalition. Recently, Moody's downgraded France's credit rating from Aa2 to Aa3, placing it three notches below the top rating. The agency cited its decision on the perception that there is little chance the upcoming government will successfully and sustainably reduce the current fiscal deficits