Global easing cycle set to continue after Swiss cut

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The Swiss National Bank (SNB), which kicked off the global easing cycle back in March, cut rates for a third time on Thursday, taking its policy rate 25 basis points lower to 1%. Switzerland largely avoided the surge in inflation afflicting much of the developed world over recent years, and consumer prices rose by just 1.1% in August, down from 1.3% in July. Inflation has now been in the SNB's target range of between 0% and 2% for the past 15 months.

The central bank warned that additional cuts “may be necessary in the coming quarters” to prevent inflation from slowing further. The strength of the Swiss franc against both the euro and US dollar since the SNB's last cut in June has added to downward pressure on inflation, and recent business survey readings have been weak. We now expect two additional 25bp cuts from the SNB.

Despite this, having acted early in cutting rates, we believe the Swiss central bank is now approaching the end of its cycle. By contrast, the global trend toward lower rates still has much further to go, and this should further erode returns on cash.

The Fed’s easing cycle is just getting started. The Federal Reserve cut rates by 50 basis points at its September meeting, setting its target range at 4.75-5%. The “dot plot,” which charts the interest rate projections of top Fed officials, suggests an additional 50bps of cuts by year-end and another 100bps in 2025, aligning with our base case. Friday’s release of the US personal consumption expenditures (PCE) index-the Fed’s preferred inflation measure, partly due to its lower emphasis on shelter costs-should reassure investors that inflation threats have largely subsided, in our view.

The European Central Bank (ECB) will need to take further action to support subdued growth. The ECB cut rates for a second time this year, earlier in September. President Christine Lagarde gave little away about the likely path of easing, which she said was not pre-determined-“neither in terms of sequence, nor in terms of volume.” We believe the central bank may skip a cut at its next meeting in October. However, the ECB is expecting sluggish growth of 0.8% for 2024 overall, rising to 1.3% in 2025, while it sees inflation headed back to the 2% target over the coming years. Our base case is for the main policy rate to be reduced on a quarterly basis until reaching 2-2.25% by the end of 2025.

However, the persistent weakness in domestic demand and looming risks to growth-such as the potential for a trade conflict following the US election-could open the door for a faster cutting cycle if inflation pressures continue to fade.

Except for Japan, other major central banks look set to cut rates further into 2025. Our base case is for the Bank of Japan to nudge rates 25 basis points higher around the middle of next year, taking the policy rate to 0.5%. But elsewhere, we expect a broad trend toward more easing. We see the most aggressive move from the Reserve Bank of New Zealand, with 200 basis points of cuts by September 2025. Our base case is for 150 basis points of reductions by the Bank of Canada over the same period, with 100 basis points off the policy rate from the Bank of England. While the Reserve Bank of Australia is likely to wait until next spring before starting its easing cycle, we do expect 75 basis points of easing by September 2025. The broad theme, in our view, is that central banks are shifting their focus from combating inflation to supporting growth and will gradually bring policy back to a neutral setting.

So, against this backdrop, we advise investors to position their portfolios for a lower rate environment. While most gains in government bonds have likely already been realized over recent months, we believe there are still durable income opportunities in investment grade bonds and diversified fixed income strategies. Bond ladders, which seek to match the maturing of fixed income instruments with expected spending needs, can also help optimize returns.

Within currencies, we see opportunities emerging as the Federal Reserve's aggressive rate cuts and fiscal deficit concerns weaken the US dollar. We therefore recommend reducing US dollar exposure by hedging dollar assets or adding international exposure. We also remain Most Preferred on the Australian dollar, supported by the Australian central bank holding rates steady and China's stimulus measures. Additionally, with the Swiss franc likely to appreciate, non-domestic investors with CHF loans should hedge against further franc strength.