Slowly but surely the interest-rate jigsaw puzzle is falling into place. Get ready for the much anticipated shift lower in the global monetary policy cycle by mid-year. Where the Federal Reserve steers, the rest tend to follow — central banks may be nominally independent of governments, but they’re somewhat less independent of each other — making it likely the three main monetary institutions will move in lockstep.
Fed Chair Jerome Powell made clear in his Congressional testimony last week that with inflation heading towards its 2% target, rates can soon be lowered. February’s nonfarm payrolls report last week continued the trend of slightly softer job growth and weakening earnings. Powell doesn't necessarily require inflation data to improve to ease, just for it not to worsen. He's becoming more confident that the Fed is "not far" from finally pulling the cut trigger. These conditions ought to be fully in place by its June 12 meeting.
The European Central Bank is shouting from the rooftops that its June 6 meeting will bring its first rate cut for five years. President Christine Lagarde’s comments at Thursday's press conference that “we will know a little more in April but a lot more in June” set the tone. Often the message from the Q&A session gets corrected afterwards by unidentified ECB sources — but this time it was reaffirmed.
Even the most hawkish policymaker, Austrian central bank chief Robert Holzmann, admitted a "change in rates may be in preparation." French central bank head Francois Villeroy de Galhau went further, saying it's "very likely the ECB will cut rates in April or June." That dovish tilt, from one of the best barometers of ECB thinking, was backed up by supportive remarks from the typically hawkish Finnish and Lithuanian central bank leaders. Bloomberg Economics expects a first cut of 25 basis points in June, and further quarter-point reductions at each of the remaining four meetings in 2024 taking the official rates down to 2.75% from 4% now.
As the chart above shows, the Bank of England is expected to lag its peers. The futures market suggests there’s only a 50% chance of a reduction at the Monetary Policy Committee’s June 20 meeting — which comes after both the Fed and ECB decisions. By then, the UK could have the lowest inflation rate and the weakest economy, adding to the pressure on UK policymakers to accelerate its shift to easing.
Running a punitive monetary regime with the highest real interest rates will exact a heavy toll on growth. If the pound strengthens as UK rates stay highest, it’ll hamper British exporters. The resurgent services sector has been winning foreign business in recent years, notably from the US, spurred by sterling’s weakness against the dollar. The pound’s recent strength threatens to undermine a crucial support for the UK economy. That’s why central banks tend to flock together — to avoid the disruptive economic consequences of currency dislocations.
The BOE already suffers from the lowest public confidence on record. If it continues to be transfixed on restoring its inflation-battling credibility when its peers move on, it risks being viewed as intransigent. To be fair, Governor Andrew Bailey has left some wiggle room to bring the rate-cut timetable forward, with the February monetary policy review featuring a pivot to an easing bias. The next step would be a reduction of its consumer price forecasts, probably at its May review, to bring them more in line with those of the Fed and ECB — and, indeed, reality. The BOE currently expects inflation to touch 2% and then reaccelerate in the latter half of this year — that looks odd when pretty much all of the UK’s economic indicators are pointing downward.
The economic headwinds slowing global inflation may abate, but central bank forward guidance has become demonstrably clearer and more confident. Rate moves rarely come alone, so expect further cuts in the second half of this year and into early 2025. Policymakers will likely lower borrowing costs by 100 basis points to 150 basis points. The nirvana is to reach a plateau where economies recover without reigniting inflation. By the time June rolls around, even the grumpy BOE might be persuaded to join the party.
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