London | Leading central banks are expected to begin cutting interest rates over the coming year as falling inflation fuels predictions among investors and economists that prices are under control.
After entering 2023 amid competitive interest rate hikes, the Federal Reserve, the European Central Bank, and the Bank of England suspended their tightening systems in the second part of the year.
Post-Christmas sales in Madrid, Spain. The ECB, BoE and Federal Reserve are all expected to start cutting rates this year. Bloomberg
Now, as headline inflation rates decline in much of the G7 industrialized countries and their economies slow, pressure on policymakers’ borrowing prices is likely to increase.
“We expect inflation to fall further than central banks expect,” said Neil Shearing, group chief economist at UK-based Capital Economics. He noted that growth was weakening just as distortions caused by the Covid-19 pandemic and global energy crisis were unwinding.
“Policy is now quite restrictive, meaning central banks can ease it without necessarily being growth-friendly. Think of it as urgent to put the brake on less hard than pressing the accelerator,” he said.
Investors are betting the Fed will cut for the first time in March, with five quarter-point cuts to follow during the year, according to market pricing. The ECB and the BoE are also expected to lower rates six times in 2024, with the former starting in March or April and the latter in May.
Financial markets ended 2023 sharply higher as investors became convinced that the Federal Reserve was in a position to start easing policy after its Dec. 14 resolution to keep rates unchanged. The rally put the MSCI World Index, a gauge of global stocks, on track for its most productive annual performance since 2019.
After stripping out energy and food, US inflation fell to 1.9 per cent in November. AP
The key moment came at the Federal Reserve’s December meeting, when it released projections that looked like officials expected its benchmark federal budget rate (lately at a 22-year high of 5. 25% to 5. 5%) to be cut across 75 core issues over the next few years. months. 12 months.
Speaking at the meeting, Fed Chair Jay Powell failed to refute market expectations for sharp rate cuts in 2024, saying the central bank was “aware of the threat that we could go on for too long” if We had too strict a policy. “We know it is a threat and we are very determined not to make that mistake,” he said.
Other US rate-setters, including New York Fed president John Williams, subsequently sought to damp some of the speculation about early Fed rate cuts, but investors appear confident the central bank has done enough to begin easing.
The slowdown in value expansion in November pushed the six-month annualized rate of core non-public spending, which excludes energy and food, to 1. 9 percent, just below the central bank’s official inflation target of 2 percent. hundred.
“To achieve a comfortable landing and increase the likelihood of maintaining full employment while inflation falls, the Fed wants to adopt a more forward-looking economic policy strategy,” said Tomasz Wieladek, an economist at the fund manager. Investment by T Rowe Price.
He argued that financial policy would remain in “restrictive territory” even after the Federal Reserve’s first cuts, adding: “Inflation dynamics allow, and even justify, a rate cut as early as March 2024. “
However, by allowing monetary situations to ease, central banks threaten to increase expansion and asset costs and provide a moment of stimulus to inflation. The ECB and the Bank of England have struck a more hawkish tone than Powell, signaling in December that it was too early for the fight against inflation.
Eurozone inflation slowed to 2. 4 percent in November, well below its peak of more than 10 percent a year earlier and close to the ECB’s 2 percent target. But economists remain cautious about the threat of additional value increases.
A Financial Times poll shows that most economists surveyed expect the ECB to start cutting rates during the second quarter of 2024, but two of them expect such a move in the first three months of the year.
“I think that the ECB will likely cut in June 2024 at the earliest,” said Wieladek. “Data points such as negotiated wage growth, compensation per employee and unit labour costs all continue to imply persistently high inflation in the medium term.“
The BoE is also facing calls to acknowledge progress in the battle against inflation after a steep fall in the rate of consumer price growth to 3.9 per cent in November, down from a high of more than 11 per cent in October 2022. A third-quarter contraction in the economy has added to the pressure.
Jonathan Haskel, one of the hawks on the Bank of England’s financial policy committee, later said on social media site X that there was “news” on the news that a slowdown was appearing in a key measure of facility inflation. But he also insisted that politics should not evolve. on the basis of a single publication.
Andrew Goodwin, lead economist at consultancy Oxford Economics in the UK, said November’s inflation figures will be “a game-changer” for UK financial policy, adding that while the Bank of England would be nervous about upcoming wage negotiations, it expects the bank to start doing so. rate cut in May.
UK Chancellor Jeremy Hunt told the Financial Times in late December: “There is a moderate possibility that, if we stay on the course we are on, we will be able to bring inflation down; the Bank of England could possibly start cutting interest rates. rates. “
Shearing argued that disinflation is more advanced in the United States than in Europe, which could allow the Federal Reserve to cut rates faster than some of its peers. But with core inflation falling, he added, 2024 “will likely be the year of interest rate change in the evolved world. “
Additional information via Tommy Stubbington in London
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