This week, major central banks reached a crucial juncture. Here's the update and what's to come.

• Central banks worldwide are evaluating when they will loosen their restrictive monetary policies, which were implemented to control rampant inflation.
• The Bank of Japan is unique in that it has kept negative interest rates for 17 years to stimulate a sluggish economy and increase inflation.
• That experiment finally ended on Tuesday.

This week, Switzerland became the first major economy to cut interest rates, while the Bank of Japan hiked for the first time in 17 years.

Central banks worldwide are still attempting to determine when they will loosen their strict monetary policies, which were implemented to control high inflation, in order to maintain a stable economy.

Bank of Japan

The Bank of Japan's experiment with negative interest rates for 17 years, as well as its unconventional policies of yield curve control and quantitative and qualitative easing, ended on Tuesday.

Following ongoing negotiations between unionized employees and Japan Inc, Japan is anticipating a surge in wages. BOJ policymakers predict that these higher salaries will stimulate domestic demand and lead to an increase in inflation.

Pimco Japan's co-head, Tomoya Masanao, stated that the long-term effects of the shift could be greater than expected by markets, and the crucial issue is determining where Japanese inflation rates will stabilize after the pandemic.

Masanao stated that while the BOJ affirmed its dedication to the 2% inflation objective, it is unlikely that the BOJ will persist with its accommodative monetary policy indefinitely to attain its target.

"The BOJ's medium-term policy adjustments will likely entail both balance sheet reduction and interest rate increases. Although there may be challenges from a global economic slowdown and rate cuts from other major central banks, the BOJ is prepared to gradually reduce its enormous balance sheet."

Swiss National Bank

The Swiss National Bank on Thursday announced a 0.25 percentage point reduction in its main policy rate to 1.5%, stating that inflation is expected to remain below 2% in the near future.

Since June 2023, Switzerland's headline and core consumer price index inflation rates have remained below the projected levels, and the central bank has revised its projections to 1.4% by year-end, then 1.2% in 2025 and 1.1% in 2026.

The SNB took into account the strength of the economy when deciding to ease its policy.

BCA Research strategists warned in a note on Friday that persistent currency strength poses a deflationary risk for the Swiss economy if inflation falls below 2%.

"Additionally, a weak CHF makes Swiss exports less competitive. This is particularly relevant given the SNB's emphasis on weaker global economic activity as the primary threat."

U.S. Federal Reserve

The Federal Reserve kept interest rates unchanged at 5.25%-5.5% on Wednesday and affirmed its plan to cut rates by 25 basis points three times in 2023.

Despite projections of stronger growth, lower unemployment, and slightly higher-than-expected core inflation, the Fed's first cut is expected to occur at its June 11-12 meeting, according to CME Group's FedWatch tool.

Goldman Sachs Asset Management's co-head of fixed income and liquidity solutions, Whitney Watson, stated in a note that the slight increase in the longer-run policy rate forecast is both insignificant and significant. It is insignificant because market expectations are already high, but significant as it confirms the market's recent belief that the rate-cutting cycle may not be as deep as initially predicted.

Despite "bumps in the inflation road," major central banks are expected to make cuts in the near future.

Bank of England

On Thursday, the Bank of England kept interest rates at 5.25% but gave a dovish signal as two members on the Monetary Policy Committee dropped their votes for a 25 basis point hike, resulting in an 8-1 split in favor of holding rates, while one member voted to lower them.

The governor stated that the fundamentals were "progressing positively" for a reduction in interest rates, as U.K. headline inflation decreased more rapidly than anticipated, the job market cooled, and wage growth slowed.

Sanjay Raja, a U.K. economist, pointed out that although rate cuts will ease the bank rate, it will still remain in a restrictive territory. However, the changing rhetoric indicates that the MPC may start adjusting the level of restrictiveness as inflation and wage pressures decrease.

Raja pointed out that the evidence required to lower interest rates is not as clear. Although the MPC stated that "a further accumulation of evidence on inflation persistence would be required" to change the monetary policy stance, the minutes also acknowledged that members differed on the amount of evidence needed for a reduction in Bank Rate.

Despite the uncertainty surrounding the evidence needed, Deutsche Bank remains committed to its call for a cut at its next meeting on May 9. However, market futures only predict a 25% chance of this happening, with economists being divided between June and August.