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Client Update - 22nd March 2024

This week is undoubtedly one for the history books, as the Bank of Japan (BoJ) raised interest rates for the first time in 17 years, ending the world’s only remaining negative rates regime. This major shift signals a return to traditional monetary strategies and demonstrates a renewed confidence in Japan's path to recovery from years of deflation and economic stagnation.

In addition to this, the BoJ announced several other monetary policy adjustments aimed to stimulate the economy by encouraging spending and investment, while also keeping inflation in check.

Shifting our focus to the United States, the Federal Reserve (Fed) conducted its March Federal Open Market Committee (FOMC) meeting on Wednesday. The Committee unanimously decided to maintain interest rates at their 23-year peak of 5.25% to 5.5%. This move was widely anticipated by markets, but it was the comments made by policy makers following the meeting that caused markets to move higher. Their statements indicated a continued expectation from the Fed to lower interest rates by three-quarters of a point over the year, propelling the US equity markets higher. These developments suggest that despite recent mixed economic data, including hotter readings on inflation over the past two months, the Fed is positioning itself to commence rate cuts soon, with Wall Street betting that the first-rate cut will come in the summer.

A day later, the Bank of England made the decision to keep rates at 5.25%, in line with market expectations. This decision saw two of the Bank's previously staunch advocates for rate hikes retract their support, siding with the majority to keep rates steady, with one member voting for an immediate cut. This decision came after the release of UK inflation data on Wednesday which showed inflation has fallen more than forecasted to 3.4%, the lowest since 2021. Governor Andrew Bailey commented that while we are not quite at the point to cut rates, inflation is moving in the right direction, signaling that the Bank is inching towards easing borrowing costs. Echoing trends in the US, market forecasts continue to incorporate three quarter-point rate cuts throughout 2024, with expectations for the initial reduction to occur in the summer.

Interestingly, while all the above major central bank decisions were as expected, having been priced in by the market, the Swiss National Bank (SNB) announced a surprise rate cut becoming the first central bank in the developed world to cut rates in this cycle. While the European Central bank remain fretful over inflation and have kept rates steady in their decision earlier this month, this move by SNB, although less significant than the other decisions this week, is a positive sign of policymakers’ confidence over falling inflation.

The investment teams focus on strategies that will perform well in a falling inflationary environment continues to add value to our client portfolios, with an added tailwind in the offing should developed market central banks actually start to cut rates. Good news to lead us into the weekend.

As we head towards a Bank Holiday weekend at the end of the month, we will be taking a short break from our weekly update and will be back with you on 12th April. Do have a good Easter break.

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