Central Banks Tread Cautiously in Post-Pandemic Rate Cut Era

Central banks globally are cutting interest rates, but the extent and duration of this easing cycle remain uncertain due to higher underlying rates post-pandemic. Policymakers from the Federal Reserve, ECB, and Bank of England agree that the 'neutral' rate is likely higher than before, requiring careful monitoring of economic conditions.

Central banks worldwide are cautiously navigating interest rate cuts, with a real-time experiment underway that scrutinizes changes in the global financial landscape since the pandemic. Crucially, higher underlying rates might make this easing cycle short-lived.

The Federal Reserve's recent half-point rate cut joins initiatives already in motion at the European Central Bank and the Bank of England. Analysts credit these moves for enabling China's significant stimulus without impacting local currency values. However, policymakers remain uncertain how long and how far this easing will continue, as they grapple with higher rates needed to manage inflation and economic growth compared to the ultra-low rates pre-pandemic.

Fed Chair Jerome Powell and other officials admit they cannot pinpoint the 'neutral' rate to stabilize the economy outside of observing real-world effects. The post-pandemic economic environment, shaped by demographic and productivity trends, suggests a more complex path ahead for monetary policy.

(With inputs from agencies.)