FTSE Russell Insights

Timing, tempo and terminal rates – lessons from previous G7 easing cycles

Robin Marshall

Director, Global Investment Research, FTSE Russell
Market focus has shifted towards prospects for G7 central banks easing in 2024, after the Fed pivot at the December FOMC. In this short note, we explore what lessons can be drawn about the timing, tempo and terminal rates in major G7 easing cycles since 2000.
 
  • Markets are already discounting considerable central bank interest rate cuts in 2024
  • Are these expectations realistic, given the relatively soft landings for the G7 economies?
  • Is the next easing cycle likely to be qualitatively and quantitatively different from GFC and Covid cycles?

Easing cycles are typically faster than tightening cycles

Chart 1 shows the path of G7 policy rates since 2000, in both easing and tightening cycles. Although the 2022-23 tightening was an exception (525bp of tightening in 16 months plus Quantitative Tightening), previous tightening cycles have generally taken longer than the easing cycles that followed them. This is because something has generally been “broken” during the tightening cycles – e.g., the financial system in 2007-08, or supply chains in tradeable goods in 2020 after the Covid shock, increasing systemic risks and requiring rapid policy responses from central banks. There is much less evidence of something breaking in the current cycle. There were concerns about systemic risk in the US regional banking system in 2023, and duration mismatches, as rates rose quickly, but the Fed defused those by making emergency funding available at the discount window and reviving term lending support.

Chart 1: Central bank policy rates since 2000

Chart 1 shows the path of G7 policy rates since 2000, in both easing and tightening cycles.

Source: LSEG, January 2024. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures. 

GFC and Covid easing cycles were faster with deeper cuts

Looking at the easing cycles in more detail, Table shows the three major G7 easing cycles since 2000. The main lessons are:

  1. easing cycles were well co-ordinated across the G7;
  2. Covid rate cuts were the fastest administered easing moves since 2000;
  3. the easing cycle in response to the global financial crisis (GFC) in 2007-09 was the most substantial, with sizeable Quantitative Easing (QE) and large rate cuts;
  4. the 2000-03 easing cycle was much slower and drawn out;
  5. the Bank of Canada easing cycles have been the fastest, apart from the GFC, which Canadian banks largely missed;
  6. the ECB started easing cycles later than others and;
  7. easing cycles with lower terminal rates have been more rapid, reflecting more extreme initial dislocation in economies and financial markets.

Table 1: G7 central bank easing cycles since 2000

Central bank 2000-03  easing cycle  2007-09 easing cycle  2019-20 easing  cycle Longest & shortest easing cycles Average monthly easing rate Notes
US Fed 6.50% to 1.00% in 30 months from Jan 2001 5.25% to 0.125% in 15 months from Sep 2007 2.38% to 0.125% in 8 months from July 2019 30 months & 8 months 24bp Much slower 2000-03 cycle, than others; major QE support
Total cycle Easing 550bp 512bp + QE* 225bp + QE*      
Bank of Canada 5.75% to 2.00% in 12 months from Jan 2001  4.75% to 0.25% in 16 months from Dec 2007 1.75 % to 0.25% in 1 months from March 2020 16 months & 1 month 34bp Less severe GFC shock. Faster moves than Fed otherwise
Total cycle Easing 375bp 450bp  150bp + QE      
Bank of England 6.00% to 3.50% in 29 months 5.75% to 0.50% in 15 months from Dec 2007 0.75% to 0.10% in 1 months in March 2020 29 months & 1 month 19bp Similar pace of moves to Fed, and QE
Total cycle easing 250bp 525bp + QE 65bp + QE      
European Central Bank 3.75% to 1.00% in 25 months from May 2001 3.25% to 0.25% in 6 months from Nov 2008 N/A** 25 months & 6 months  19bp Later start to easing cycles, less QE
Total cycle easing 275bp 300bp        

*QE = Quantitative Easing asset purchases

**ECB rates were at -0.50% when Covid appeared, but QE programmes were sizeably expanded.

Source: FTSE Russell/LSEG, US Fed, Bank of Canada, Bank of England, ECB. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures. 

What explains the differences in these easing cycles 

First and foremost, the G7 easing cycles in 2007-09 and 2019-21 followed major deflationary shocks, driven by systemic risk and dislocation in the global economy. These shocks occurred after long periods of relatively low inflation, whereby perceived inflation risks were low. In contrast, the 2000-03 easing cycle was a more conventional, and gradualist policy cycle, after the TMT boom-bust, drawn out over two to three years.

Secondly, because of the success of zero rates and QE programmes in combatting deflation risks after the GFC, central banks were prepared to use zero rates and substantial QE asset purchases again in 2020, when the Covid pandemic hit. This was despite the underlying causes for the economic contraction and inflation risks being quite different, with the collapse in the financial system and credit crunch driving the deep recession of 2008-09, while Covid-Lockdowns drove the brief recession in 2020.

The lessons for 2024/25?

The Eurozone and UK have both been close to outright recession in 2023, after a more severe energy shock in 2023 than in the US and Canada. But overall, relatively soft landings for G7 growth and inflation in 2023, and a more robust financial system, make the current cycle look more like pre-GFC U-shaped cycles, than the V-shaped recessions of the GFC and Covid*, despite the energy shock and monetary tightening in 2022-23.

Barring another major shock, economic conditions would suggest neither a rapid, nor a sizeable reduction in policy rates is required, particularly in the US and Canada, suggesting a longer, slower tempo, easing cycle on rates, without the need for a resumption of QE programmes, or zero rates. Central bank reluctance to ease rates quickly may be reinforced by the criticism they received for leaving the post-Covid stimulus in place for too long, as inflation accelerated in 2021-22.

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