The Fed isn’t first to cut rates, but it is the signal other central banks want
Summary
Policymakers in the U.K., eurozone and Canada have already cut rates. But India, South Korea and others are, essentially, waiting for the Fed.The Federal Reserve’s expected rate cut Wednesday will sound the all-clear for overseas central banks that are also concerned about their domestic economic growth.
Some of the world’s most consequential central banks, including those in the eurozone, the U.K. and Canada, already started trimming interest rates in recent months. But there are a number of others, including in India, South Korea and South Africa, that have held back. And the Fed’s move could encourage them to take the plunge.
For many central banks, lowering rates ahead of the Fed risks a weakening of their national currencies. When their rates are lowered relative to U.S. rates, their currency becomes less valuable. That in turn can raise prices on their imports, creating a fresh wave of inflationary pressures.
South Africa falls into that camp. Its central bank might be the next to lower borrowing costs, with policymakers meeting Thursday.
“The fact that the Fed also looks set to start cutting rates will reassure officials that the currency will not suffer renewed falls, at least from their actions alone," said Jason Tuvey, an economist at Capital Economics.
A number of the central banks that have yet to lower borrowing costs are in Asia, where inflation rose less sharply than in other parts of the world and central banks tightened policy to a lesser degree.
With inflation set to slow, and the risk of unwanted currency depreciation easing as the Fed lowers borrowing costs, they are now set to cut. Economists at JPMorgan expect India’s central bank to lower borrowing costs next month, with the central banks of South Korea and Thailand set to move before the end of the year.
In a surprise move, Indonesia’s central bank cut its key rate for the first time earlier Wednesday, anticipating the Fed’s expected move. It noted that investors now expect the Fed to cut more quickly than they did earlier in the year, which should support Indonesia’s currency.
“These developments have led to a further reduction in uncertainty in global financial markets and increased foreign capital inflows to developing countries, including Indonesia," the central bank said.
For the many central banks in Latin America and elsewhere that have already begun to lower interest rates, the Fed’s move would remove some of their risk.
“Most central banks are probably celebrating the imminent Fed cuts," economists at Bank of America wrote in a recent note to clients.
Some leading central banks, however, have already indicated that the Fed’s entry into the rate-cutting club won’t immediately change their approach, and they include some of the most consequential.
Both the European Central Bank and the Bank of England have signaled that they will remain cautious. That is because worries persist about the pace of wage increases and the tightness of labor markets that have little to do with global economic conditions or currency exchange rates.
While that caution included room for a second ECB rate cut this past Thursday, future moves are unlikely to come in a rush unless there is a significant weakening in growth.
“Looking ahead, a gradual approach to dialing back restrictiveness will be appropriate," said ECB Chief Economist Philip Lane in a speech Monday.
The BOE is expected to leave its key rate unchanged when it meets this coming Thursday, having cut in August. It will likely indicate that it is in no hurry to lower borrowing costs further even if the Fed has removed some of the risk around proceeding more quickly. Investors expect the next cut to come in November.
While many central banks are seeing inflation cool, others aren’t so sure. Those that face more-durable inflation problems might not move until 2025.
Australia’s central bank has signaled that it won’t be in a position to lower borrowing costs until next year, despite an economic slowdown. Norway’s central bank has indicated it will be some time before it can cut.
Others face unique challenges. Russia’s central bank raised its key rate Friday. Prices there have surged as the economy has struggled to meet the demands of households for goods and services, while supplying men and materiel for President Vladimir Putin’s war in Ukraine.
And Brazil’s central bank might become the first to raise its key rate after the Fed moves in the other direction, with a policy decision due just hours after U.S. policymakers finish their meeting.
Back in 2021, Brazilian policymakers were among the first in the world to raise borrowing costs as inflation began to accelerate, and they were among the first to lower borrowing costs as consumer prices began to cool in 2023. But inflation has rebounded in recent months as growth has been boosted by government spending.
“The reason for these asynchronous central banks moves is not only different macro data, but also politics," said Christian Keller, head of economics research at Barclays. “The likely hike in Brazil has much to do with a deterioration in inflation expectations as a consequence of fiscal decisions."
Those exceptions aside, the Fed’s first cut will help broaden and likely accelerate the removal of the restraints that were placed on borrowers around the world in a largely successful effort to tame inflation.
And that might come just in time to avert a slowdown in global economic growth, with widespread signs of fragility. Europe’s economy is a weak spot, but China has also disappointed this year, and the U.S. itself appears to be cooling.
“We think easing from the Fed, from other central banks, will be sufficiently timely to avoid a recession," said Luigi Speranza, BNP Paribas chief economist. “Our central case is a soft landing."
Write to Paul Hannon at paul.hannon@wsj.com