A View to 2025: Enough With the Central Bank Hawks and Doves

As central banks around the world begin to cut interest rates for the first time since the early days of the pandemic, the path to 2025 seems fraught with uncertainty. While inflation may not reach the shocking levels of 2022, many officials doubt it will drop back to the extremely low rates seen before the pandemic. Therefore, while borrowing costs are likely to decrease in most economies, these cuts will be gradual and accompanied by a lack of triumph.

Countries like Australia and India, which have yet to make any rate adjustments, are expected to announce cuts in the upcoming months. These nations can maintain a restrictive monetary policy—an ambiguous area that hinders economic growth—while still lowering rates slightly. In contrast, China is dealing with a grim economic outlook and possible deflation, prompting a cautious approach to its monetary easing, with the concern that it may not act decisively enough.

The market isn’t (quite) everything

In financial circles, it’s common to hear that central bankers lag behind market movements. This perspective often suggests that financial markets are better indicators of economic health than the policymakers themselves. However, it’s crucial to consider the viewpoints of those responsible for economic decisions. For instance, in early 2024, while markets forecasted six cuts from the Federal Reserve, the actual result was three cuts. This illustrates that while central banks may appear overly cautious, their insight should not be disregarded.

Beyond data dependency

Monitoring economic data is important, but policymakers should not become overly reliant on it—particularly when making every monthly decision. This overemphasis on short-term data can hinder the formation of a coherent long-term strategy. If officials want to communicate a positive narrative about the economy, they must do so proactively, rather than letting every economic report overshadow their plans.

Bring forward guidance in from the cold

Once viewed as a core aspect of effective policymaking, forward guidance—communicating future policy intentions—has faded since the pandemic’s inflation spike. Having been wrong-footed by rapid inflation increases, central banks are hesitant to make bold predictions about future rate trajectories. However, with inflation re-stabilizing, perhaps it’s time to reintroduce forward guidance, which has historically helped calm markets during periods of change.

Beware of easy labels

The common labels of “hawks” and “doves” used to describe central bankers can be misleading. The views of policymakers often depend on economic conditions rather than ideological stances. For example, labeling a member of Japan's Bank as hawkish for advocating a gradual increase from nearly zero interest rates is perplexing compared to other economies. Most qualified policymakers exhibit varied perspectives throughout their careers, adjusting their responses to underlying economic realities.

Be imaginative

With the memories of prior inflation still fresh, the remarks from the Swiss National Bank President about negative rates were surprising. Although he hadn’t favored such measures, he acknowledged their potential effectiveness during an interview. In light of recent economic shifts, it might be time to reconsider such unconventional policies. The previous use of negative rates in Switzerland lasted for nearly eight years, demonstrating that inflation can rebound unexpectedly.

The coming twelve months are expected to be complex. While the initial cuts in interest rates since the pandemic were welcome, 2025 may present a mix of approaches. Some countries may swiftly pursue further reductions while others tread cautiously. Policymakers' signals may be challenging to interpret, so it’s essential to focus on credible sources rather than just those eager to speak publicly. The old dichotomy of hawks versus doves may not suffice to explain the evolving economic landscape.

economy, inflation, policy