Muzinich Weekly Market Comment: Puts in play

March 24, 2025

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In our latest roundup of the key developments in financial markets and economies, we look back at a busy week for central banks amidst heightened geopolitical risk.

Markets took a breather last week after the recent spell of soft price action, despite lingering uncertainty over tariffs and disappointing news on the peace process front. Notably, geopolitical risk was offset by communications following nine scheduled central bank meetings and one unscheduled meeting, which boosted investor sentiment.

Central banks preached messages of consistency and common sense, reassuring investors that the banks are prepared to step in and support markets if geopolitical risks cause instability, confirming that “puts” are in play.

Restrained messages were lacking on the geopolitical front, however. The first domino to fall in the Middle East saw the US administration launch airstrikes across Yemen, with President Donald Trump warning that “hell will rain down upon” the Iran-backed Houthi group if they continue to attack ships in the Red Sea.^[1]

This was followed by Israel ending its ceasefire with Hamas by launching deadly airstrikes across Gaza. Prime Minister Benjamin Netanyahu vowed to act with “increasing military strength” against Hamas, accusing the Palestinian organization of refusing to release the remaining hostages taken during the October 2023 attacks.^[2] Meanwhile, in Turkey, authorities detained President Recep Tayyip Erdoğan’s top political rival, Istanbul Mayor Ekrem Imamoglu, on corruption charges, escalating tensions across the country.^[3]

Diplomacy on ice

More disappointing news came from the much-anticipated phone call between Trump and his Russian counterpart. Vladimir Putin rejected Trump’s appeal for a full 30-day ceasefire, a setback to US efforts to end the three-year-long war. Although the two sides agreed to continue negotiations, Putin’s only concession was to halt attacks on energy infrastructure for 30 days.

However, just hours after the call, Kyiv and other parts of Ukraine came under a massive Russian drone attack, highlighting Moscow's continued assault on Ukrainian civilian infrastructure. German Defence Minister Boris Pistorius said, “Putin is playing a game, and I’m sure the US president won’t be able to sit by and watch for long.”^[4]

On the subject of games, in a somewhat bizarre twist the Kremlin claimed that during the call between the US and Russian leaders, Putin proposed staging ice hockey matches between US and Russian players, an idea Trump reportedly supported.^[5]

Trump’s perceived favouritism toward Putin has led some commentators to suggest he is attempting to engineer a “reverse Nixon”.^[6] This is a nod to Richard Nixon’s Cold War strategy of isolating Russia by strengthening ties with China, culminating in his historic 1972 visit to Beijing that ended 25 years of non-communication between the two nations. The modern-day equivalent, they argue, is Trump’s effort to build closer ties with Russia instead of China, but with the same strategic goal: to drive a wedge between Moscow and Beijing.

In what should be a positive for economic output (although not necessarily government bonds), German lawmakers passed a landmark defence and infrastructure spending package in the lower house of parliament.^[7] “This is possibly the biggest spending package in the history of our country,” claimed Lars Klingbeil, co-leader of the Social Democrats.^[8]

The package allows defence spending in excess of 1% of GDP to be exempt from constitutional borrowing restrictions. A special, off-budget infrastructure fund will be empowered to borrow as much as €500 billion over 12 years and Germany’s 16 states will have leeway to borrow as much as 0.35% of GDP, or the equivalent of around €16 billion, instead of being required to run balanced budgets.

Support acts

Normally, a schedule of nine central bank meetings would take centre stage for investors, but in the current environment, their role has been reduced to that of a support act. The common thread from all nine meetings was that global economic uncertainties have increased under the new US administration. The central banks emphasized their role is to be supportive, not disruptive, of financial markets. As a result, they opted to hold rates steady, unless the adjustments were clearly signalled and in line with consensus, which was the case in both Switzerland and Brazil.

Across the board, central banks are taking a measured and understandable ‘wait and see’ approach.

The Bank of Japan monetary policy committee (MPC) voted unanimously to keep its policy rate at 0.50%.^[9] The committee's decision on the timing of the next rate hike will depend on the balance of risks between domestic inflationary pressures and external factors related to tariffs. The overnight interest rate swap market is currently pricing in a 56% likelihood of a 25 basis points (bps) hike in June.^[10]

In the UK, the Bank of England’s (BOE) MPC voted 8 to 1 in favour of keeping the benchmark policy rate at 4.5%, with only one member calling for an immediate rate cut. “There’s a lot of economic uncertainty at the moment,” said BOE Governor Andrew Bailey.^[11] Policymakers face the challenge of balancing a weak domestic economy, which was already struggling to gain traction due to a resurgence in inflation driven by higher energy bills. The overnight interest rate market is only pricing 44bps of loosening for the remainder of 2025.

The US Federal Reserve kept the federal funds rate in a range of 4.25–4.50% and said it would further slow the pace at which it is reducing its balance sheet.^[12] The Fed said: “uncertainty around the economic outlook has increased,” and removed its prior language stating the risks to achieving its employment and inflation goals were roughly in balance.

From its updated economic projections, growth was slashed most aggressively for 2025, from 2.1% to 1.7%, while inflation risks were described as near-term and transitory, which could allow the Fed to continue normalizing policy rates.^[13] A narrow majority of the Federal Open Markets Committee favour two 25bps cuts over the course of 2025, signalling a gradual easing of monetary policy.

Outliers

The central bank outliers included the Swiss National Bank (SNB), which cut its policy rate to 25bps, making it the lowest among the central banks we cover (see Chart of the Week).^[14] The SNB stated its decision was appropriate given the "heightened downside risk to inflation", projected at only 0.4% in 2025, adding that lowering policy rates would further discourage excessive “safe heaven” capital flows that could cause the Swiss franc to appreciate, dampening prices further.

At the other end of the spectrum, Brazil’s central bank delivered a 100bps rate hike for the third consecutive meeting, in line with expectations, pushing the Selic rate up to 14.25%.^[15] Brazil’s real interest rate now stands at 9.2%, well above the central bank's neutral rate of 5%, making it the highest real rate among the central banks we cover. The Selic rate is expected to peak at 15% this summer.

The duration of this ultra restrictive monetary policy will depend on how quickly inflation converges towards the central bank’s 3% target. If the Brazilian real continues to appreciate — it is up 12.3% YTD — or there is a sharp downside surprise to growth, the Selic rate could be lower before year end.

Finally, a surprise unscheduled meeting took place in Turkey, where the central bank hiked the overnight lending rate by two percentage points to 46% to stabilize capital markets.^[16] This followed heavy losses on Wednesday, triggered by the detention of Ekrem Imamoglu.

The US administration may want to take note that Brazil and Turkey's central banks have been forced to tighten monetary policy to stabilize their capital markets and currencies, decisions driven by administrative disappointments, fiscal largesse in the case of Brazil, and attempts to remove political opposition in the case of Turkey.

Chart of the Week: Central bank policy rates vs. real rates

Source: Bloomberg, World Interest Rate Policy, as of March 21, 2025. For illustrative purposes only.

 

Past performance is not a reliable indicator of current or future results.

References

[1] Reuters, ‘Trump launches large-scale strikes on Yemen's Houthis, at least 31 killed,’ March 16, 2025
[2] Associated Press, ‘Israel launches deadly wave of airstrikes across Gaza,’ March 18, 2025
[3] Bloomberg, ‘Turkey Detains Erdogan’s Top Rival, Triggering Market Meltdown, March 19, 2025
[4] The Guardian, ‘Europe’s leaders react with scepticism to partial Ukraine ceasefire,’ March 19, 2025
[5] Associated Press, ’Trump and Putin discuss a US-Russia hockey series during their call, Kremlin says,’ March 19, 2025
[6] International Centre for Defence and Security, ‘Why the ‘Reverse Nixon’ Strategy Will Fail: The Illusion of Decoupling,’ March 17, 2025
[7] Politico, ‘German parliament passes historic spending reforms,’ March 19, 2025
[8] DW, ‘Germany's Bundestag votes in favor of reforming 'debt brake', March 19, 2025
[9] Bank of Japan, ‘Statement on Monetary Policy,’ March 19, 2025
[10] Bloomberg, ‘World Interest Rate Policy,’ as of March 21, 2025
[11] Bank of England, ‘Bank Rate maintained at 4.5%,’ March 20, 2025
[12] Federal Reserve, ‘Federal Reserve issues FOMC statement,’ March 19, 2025
[13] Federal Reserve, ‘Federal Reserve Board and FOMC release economic projections,’ March 19, 2025
[14] Swiss National Bank, ‘Monetary policy assessment,’ March 20, 2025
[15] Banco Central do Brasil, ‘Copom increases the Selic rate to 14.25,’ March 19, 2025
[16] Central Bank of Turkey, ‘Interim Monetary Policy Committee Meeting Decision,’ March 20, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of March 24, 2025, and may change without notice. All data figures are from Bloomberg, as of March 21, 2025, unless otherwise stated.

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