Central banks won't wait for the Fed to cut rates

For many years, central banks around the world kept a very close eye on the Federal Reserve—with some only moving to cut or hike interest rates after the U.S. did.

But his long-held tradition is starting to change.

The European Central Bank already bucked the trend by lowering its base rate for the first time in five years last month. Analysts believe this was a mistake—and the trading bloc had "almost boxed themselves into a corner."

As newly released minutes from the ECB's monetary policy meeting in June show, "some members" had aggressively lobbied for rates to remain unchanged at the time.

Meanwhile, the Swiss National Bank has cut its base rate twice so far this year, becoming the first Western central bank to do so all the way back in March.

Over in Britain, where inflation has finally fallen back to its target of 2%, there are growing murmurings that a cut could come into force on August 1.

The Times of London recently reported that a closely watched survey shows businesses are intending to slow down the pace of price rises on customers, and wage hikes for workers.

This would undoubtedly be an early economic boost for Sir Keir Starmer, who is widely tipped to become Prime Minister in a Labour landslide.

Bank of England Governor Andrew Bailey has already said that the Fed's strategy won't have any bearing on his decision making.

Unsynchronized easing

Recent research by Bloomberg Economics says global policymakers are gearing up to reduce the cost of borrowing, irrespective of what the Fed does.

However, there are expectations that rate cuts in the coming 18 months will happen at a much slower pace than previously anticipated.

Tom Orlik, Bloomberg's global chief economist, said rampant inflation in the aftermath of the Covid pandemic "has ripped up the central bank playbook."

"The normal 'up on the escalator, down on the elevator' pattern has been reversed, with rates rising swiftly and falling slowly. The Fed's pull as a global anchor appears diminished," he said.

Chatham Financial recently published a report suggesting that this could also have ramifications for the strength of the U.S dollar.

"The Fed's chosen timing for rate cuts will undoubtedly have global economic implications, but central bank leaders have emphasized that their respective focuses remain on their own countries' inflation data," Amol Dhargalkar wrote.

While all of this is unfolding, the Bank of International Settlements has urged policymakers to think very carefully before slashing rates too quickly.

"A premature easing could reignite inflationary pressures and force a costly policy reversal—all the costlier because credibility would be undermined," its annual report said.

General manager Agustín Carstens was quoted as likening hiked rates to a course of medicine, "You have to do the whole treatment otherwise inflation might come back."