Rate Cuts and Balance Sheet Reductions: Divergent Monetary Policies of G7 Central Banks in 2024

Toronto, Canada – In 2024, major central banks worldwide found themselves facing different paths in their strategies to combat inflation. The year had begun with the common goal of reaching a 2% inflation target, leading to potential policy rate reductions. However, as the months progressed, disparities emerged in the approach taken by these financial institutions.

The Bank of Canada made waves as the first G7 central bank to lower its overnight policy rate after staying at 5.0% since July 2023. The rate cut to 4.75% marked the bank’s first reduction in four years, following a series of rate hikes triggered by a peak in CPI at 8.1% in July 2022. Despite this tightening policy, the CPI gradually declined, hitting 2.7% in April, the lowest in three years.

Meanwhile, the European Central Bank (ECB) followed suit by cutting its Deposit Facility Rate by 25 basis points to 3.75%, marking its first rate cut since 2019. The move signaled progress in combating inflation, which peaked at 10.6% in the past. However, unexpected challenges arose with a sudden increase in headline inflation just before the rate cut announcement.

The Federal Reserve took a different approach, facing obstacles in reaching its 2% target amid solid job growth and inflation rates hovering above expectations. With little improvement in inflation figures, the Fed’s policymakers hinted at a paused approach to rate cuts in their upcoming meeting. The institution continued its trajectory of benchmark rates amidst a resilient labor market.

In Japan, the Bank of Japan made a significant shift by raising its policy rate earlier in the year, diverging from its previous ease policy stance. The move aimed to narrow the yield gap with other major central banks, emphasizing the country’s commitment to addressing inflation concerns. The bank’s upcoming decisions on bond purchases will shed light on its future policy direction and adjustment to global economic challenges.

As central banks navigate through uncertain economic landscapes, the divergence in their strategies highlights the complexity of achieving common goals while adapting to unique national contexts. Each bank’s approach reflects a delicate balance between easing policies and maintaining economic stability in the face of evolving global trends. This unprecedented period underscores the critical role of central banks in shaping financial landscapes and responding to dynamic economic conditions.