Opinions on the stock market: What next for central banks?

After a long period of negative interest rates and rising inflation, central banks have hiked interest rates. But how did we get to this turning point, what impact will it have on the global economy and what does the future hold? Find out more in our blog.

How did we get to this turning point?

Consumer prices shot up all over the world after the pandemic in 2020, and central banks ushered in the longest period of rate hikes in decades to combat inflation. Since 2021 rates in advanced economies have been raised an average of 400 basis points, and around 650 points in emerging markets.


How did the Swiss National Bank react to the rate hikes?

In this country, the Swiss National Bank (SNB) had to intervene: 2022 saw inflation shoot up to a peak of 3.5%. As a consequence, it hiked the benchmark rate five times in a row to 1.75%.


Have the rate hikes by central banks worked? In general, the action taken by the central banks seems to have worked – consumer prices have fallen globally. In Switzerland inflation fell steeply and is now below 2%, i.e. within the stability range the SNB has set. Looking at the figures in detail, it is clear that inflation has declined all over the world. This is mainly because energy prices are lower and supply chains, which had been blocked for a long time as a result of the pandemic, are now operating better.


But are we still in a period of higher inflation?

Yes. Despite the promising trend, inflation outside Switzerland is proving stubborn. In both the US and  Europe, consumer prices are still well off the central banks’ 2% target.


What effect do higher interest rates have on economic performance?

In spite of the positive effect on inflation, economic performance is suffering from the negative effects of the rate hikes. A research paper from the Federal Reserve Bank of San Francisco suggests that increasing interest rates by 1% can cut gross domestic product (GDP) by 5% over 12 years. The most recent economic data from the G7 also show clear signs of a slowdown. According to the Robert Habeck, the German Minister for Economic Affairs, German GDP is set to grow just 0.2% this year. Similar noises are emerging from neighbouring France, too, where Minister of Finance Bruno Le Maire has cut the GDP growth forecast for this year from 1.4% to 1%.


What are the prospects for growth in Switzerland?

The prospects for growth in this country are not exactly rosy. The State Secretariat for Economic Affairs (SECO) is anticipating economic growth this year of 1.1% (adjusted for sporting events ) – well below average.


Does Bank CIC agree with SECO?

We are cautious on growth: we expect it to be slightly positive for the global economy. We see a minor recovery in the second half of the year. It’s important to distinguish between regions; we see annual growth below potential in the USA and Switzerland, while a technical recession is a possibility in the eurozone.


Where do we go from here?

Leading central banks like the ECB and the Fed are still waiting for the data to improve before cutting interest rates, but the SNB reduced its benchmark rate from 1.75% to 1.5% at its meeting in March to weaken the franc and support the economy. This makes it the first major central bank to declare that it has conquered inflation. In our view, both the ECB and the Fed will also cut rates after the summer. Pressure on central banks from the economy to cut rates is rising all the time. By the end of the year, the market is expecting interest rates to come down once to 1% in the USA and the Eurozone, and three times to 1% in Switzerland.


What factors will the central banks base their decision on?

Before the central banks turn their attention to growth, they first want to be certain that consumer prices will stay low. In the meantime, they are happy to wait. Market participants will have to hang on; neither Christine Lagarde of the ECB nor Jerome Powell of the Fed want to be held responsible for cutting interest rates and pushing inflation up again at the same time.


What effect do rate cuts have on the financial market?

The financial markets could benefit from the forthcoming rate cuts: history shows that in the 12 months following the end of a rate hiking cycle equities generally go up, as investors anticipate rate cuts, supporting economic growth and corporate revenues and earnings.