In a synchronized response to post-pandemic supply constraints and soaring energy prices, central banks around the world embarked on a period of interest rate hikes starting in late 2021. However, as inflation rates have now been tamed and sit just above or at target levels for most major economies, these central banks are now preparing for a gradual reversal of these hikes.

The world's largest central banks, including the Swiss National Bank, the European Central Bank (ECB), the US Federal Reserve, and the Bank of England, are expected to move cautiously, making small incremental adjustments with periodic pauses. One of the major concerns is the potential for ultra-low unemployment rates to rekindle inflation, which is still above target levels.

It is anticipated that the eventual bottom for interest rates will be higher than the historic lows witnessed in the last decade. Mega-shifts in the global economy's structure could influence borrowing costs, leading to higher rates for years to come.

The Swiss National Bank took the initial step towards policy easing by surprising markets with a 25 basis point cut to its key rate. This move not only brought inflation within its target range of 0% to 2% but also dispelled investor speculation that central banks would wait for the U.S. Federal Reserve to act first. It is widely expected that the ECB will be the next major central bank to cut rates in June following repeated references to that meeting.

While the Federal Reserve and the Bank of England have hinted at potential rate cuts, they have deliberately kept their language vague, leaving room for rate adjustments in either June or July, depending on economic data.

Investors anticipate that the central banks will only deliver 75 basis points of cuts by the end of this year, in three separate 25 basis point moves. These changes are considerably smaller than the rate hikes witnessed in 2022 when rates sometimes increased by the same amount in a single day. Additionally, the pricing suggests that rate cuts will occur at only three out of the five meetings held between June and the end of the year, indicating the likelihood of pauses.

While central banks in emerging market economies, such as Brazil, Mexico, Hungary, and the Czech Republic, have already implemented rate cuts, it is the major central banks that hold significant influence over global financial instruments.

However, the Federal Reserve might stand out among its counterparts. Despite the U.S. economy showing positive growth, the Fed may still cut rates or delay cuts if inflation remains stubborn. The upcoming U.S. election in November further complicates the Fed's decision-making process as it aims to avoid any perception of interfering with the vote.

In Europe, economic data continues to paint a grim picture, with Germany facing recession, the United Kingdom barely growing after a recession, and other parts of the continent relying on unexpectedly strong data from Southern Europe to stay in positive territory.

While uncertainty remains about when rate cuts could end, policymakers express confidence that ultra-low or even negative rates will not be reintroduced. Some experts argue that the world is undergoing profound changes which may reverse the historical downtrend in the neutral rate of interest. Factors such as the climate transition, digital transformation, and geopolitical shifts are expected to have a persistent positive impact on the natural rate of interest.

Central banks are now faced with the challenge of guiding their respective economies through these uncertain times, carefully calibrating interest rate adjustments to maintain stability while addressing economic challenges.