Great uncertainty about the future of global monetary policy and inflation
In light of the turbulent geopolitical situation and the repercussions of US tariffs
Investors expressed concern about the growing global uncertainty, following Norway's shock cut in key interest rates. This highlighted the implications of US tariffs, Middle East tensions, and dollar volatility, and their impact on global monetary policy and inflation, which have become increasingly unpredictable and cloud the outlook for the global economy, according to the Middle East News Agency.
Investors say volatility is expected to increase due to fluctuations in the dollar and crude oil prices driven by geopolitical factors, meaning that central banks have largely failed to provide markets and investors with a roadmap for the future.
The Norwegian krone lost nearly 11 TP3T of its value against the dollar and the euro, reflecting the currency's vulnerability to the surprise interest rate cut. Meanwhile, in Switzerland, which cut borrowing costs to zero on Thursday, traders were in a state of panic over a return to negative interest rates in the recession-hit country, where the central bank warned of the uncertainty surrounding the global economic outlook.
Global Banking and Finance Review notes that these developments came immediately after the US Federal Reserve's decision to keep key interest rates unchanged, and its chairman's statement that "no one" has any confidence in the future path of interest rates.
The platform shifts to global stocks, which have slipped from recent peaks, sending the European volatility index to its highest level in two months amid a decline in stocks across the region, while government bonds, traditionally a haven for investors from geopolitical risk, suffered heavy selling.
“We can’t see a clear direction on interest rates,” said Mark Dowding, chief investment officer at global asset manager RBC BlueBay. He added that this meant he would reduce active market bets across the group’s portfolios.
“You can’t take your cues from central banks if they themselves struggle to predict economic conditions,” says David Oneglia, director of European and global economics at TS Lombard.
The platform speaks of a period of shattering conventional paradigms. European central banks' interest rate cuts represent not only a departure from the US Federal Reserve, which is struggling with inflationary risks generated by Donald Trump's tariffs, but also a struggle to increase their resilience and mobility in a new era in which the US dollar—the backbone of global trade and the currency for pricing commodities and evaluating assets—has become weaker and more volatile amid a turbulent trade war and government concerns about mounting debt.
Nick Rees, head of macroeconomic research at Monex Europe, described what is happening now as “a massive fundamental shift in global markets that everyone is trying to assess, and all the standard economic rules we used to use for forecasting have completely shattered at the moment.” The dollar is currently down 9 percent against most other major currencies this year, but it has risen following the outbreak of war between Israel and Iran.
European Central Bank policymaker François Villaret de Galhau stated that the bank would have to adjust its plans to cut key interest rates if oil price volatility persists for longer periods.
Analysts say the new de facto policy currently affecting markets could usher in an era of central bank surprises, creating rapid shifts in market narratives, asset pricing, volatility expectations, and fragility levels.
“We are entering a new cycle where variables are more volatile,” David Oneglia, director at TS Lombard, said, “because instead of monetary policy being predictable, events, politics, and human factors—as we know now with Donald Trump—have become more dominant and play a significant role.”
Société Générale's head of foreign exchange strategy, Kit Juckes, believes Norway's surprise interest rate cut stems from the fact that the krone has been a "key runaway currency," meaning it rapidly loses value, in the era of a trade war.
As investors around the world seek stores of value other than the US dollar, the Swiss franc has surged, lowering import costs and pushing the economy into recession.
The franc rose against the US dollar at the end of last week's trading, as traders considered the Swiss National Bank's rate cut too small to control deflation.
