ECB and BoE are in no hurry to cut the rate. SNB has ended the tightening policy in this cycle

Economic news from the US on Thursday was better than expected. Weekly initial jobless claims unexpectedly fell by 19,000 to an 8-week low of 202,000, indicating a stronger labor market. In addition, retail sales for November unexpectedly rose by 0.3% m/m, which was stronger than expectations of 0.1% m/m.

More than two-thirds of the US House of Representatives voted Thursday in favor of a defense policy bill that provides a record $886 billion in annual military spending and authorizes measures such as aid to Ukraine and countering China in the Indo-Pacific region.

The Bank of Mexico (Banxico) unanimously left its key interest rate at 11.25% as expected, saying progress has been made in slowing inflation, although the outlook remains challenging. Banxico repeated previous guidance that it would have to keep the benchmark rate at current levels “for some time” to bring inflation to the 3% target, plus or minus one percentage point.

Germany’s three leading economic institutes cut their economic growth forecasts for 2024 on Thursday, saying consumer and company uncertainty, exacerbated by the weeks-long budget crisis, is slowing the economic recovery. The Ifo Institute now expects Europe’s largest economy to grow by 0.9% next year instead of 1.4%, the RWI cut its forecast to 0.8% from 1.1%, and DIW cut its forecast to 0.6% from 1.2%.

The ECB, as expected, left the deposit rate unchanged at 4.50% and said it would accelerate balance sheet reduction by allowing some bonds maturing under the Pandemic Emergency Purchase Program (PEPP) to roll over before the end of next year. The ECB will reduce its PEPP portfolio by an average of €7.5bn per month over the second half of 2024 and aims to stop reinvesting in PEPP at the end of 2024. The ECB did not even hint at policy easing on the horizon and instead maintained its rate stability guidance.

On Thursday, the Bank of England (BoE) left the interest rate at 5.25% and said British interest rates should remain high for “an extended period.” The Monetary Policy Committee voted 6-3 to keep rates at a 15-year high, and Governor Andrew Bailey said there was “still some way to go” in the fight against inflation, defying investors who are increasingly betting on a rate cut. The three dissenters voted to raise borrowing costs, and there was no talk of cutting rates.

At its December meeting, the Swiss National Bank (SNB) decided to leave the key rate unchanged at 1.75%, the same level as from June 2023. The SNB’s announcement is more dovish in nature, indicating that it is clearly not considering a further rate hike. Against the backdrop that Swiss consumer price inflation came in at 1.4% y/y in November, the 6th consecutive month below 2%, this is not surprising. The SNB has revised its inflation forecasts downward. The bank now forecasts average inflation at 2.1% y/y in 2023, 1.9% y/y in 2024, and 1.6% y/y in 2025, down from 2.2%, 2.2%, and 1.9%, respectively at the previous meeting.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) was down by 0.73%, China’s FTSE China A50 (CHA50) lost 0.67%, Hong Kong’s Hang Seng (HK50) was up by 1.07% for the day, and Australia’s ASX 200 (AU200) was positive by 1.65%.

The Central Bank of the Philippines kept its benchmark interest rate unchanged at 6.50% for the second consecutive meeting as price pressures began to ease. However, the bank said the policy should remain “sufficiently tight” for inflation to return to target. Annual inflation was 4.1% in November, compared with 4.9% in the previous month. The 11-month average was 6.2%, still well outside the central bank’s 2%-4% target.