Towards the end of 2023, it appeared clear that the world’s major central banks were changing their tone. After increasing rates at an unprecedented pace over the previous year, in a de-facto coordinated fashion, the US Federal Reserve, the Bank of England, and the Eurozone’s ECB started to signal that additional interest rate increases may not necessarily be justified.
The Federal Reserve, for example, “skipped” its rate increases in September and November, thus signalling that its “fast and furious” tightening cycle could afford at least a pause. Similarly, the ECB managed to “slot in” another 25-bps rate increase in September, in a decision that clearly divided the Governing Council, while saying that further hikes would be subject to additional scrutiny. The Bank of England instead skipped September, and in effect began its long pause in its tightening cycle, thus implementing what the Bank’s chief economist Huw Pill had labelled a “table mountain approach.”
Subsequently, between January and February all three central banks removed their tightening bias, and started to signal that the next move will not necessarily be a rate hike. At the same time, they all warned that rates will need to be kept on hold for quite some time before a rate cut could be considered. As the market tends to get ahead of itself, it has started to price in an aggressive policy easing cycle, for example by suggesting that the Fed may be cutting rates six or even seven times in 2024 – way more than the three cuts suggested by the Fed’s dot plot – and the ECB at least five times. We warned that these aggressive expectations were not justified either by data or by central bank communication.
In the last few weeks, the market seems to have come to terms with the reality that central banks will stick to what they had been saying for some time, namely that policy rates will need to be kept “high for longer.” In particular, the European Central Bank said last week that it will want to see more data on wage growth before making a decision on cutting rates, and that the bulk of those data will become available after the April meeting, making June the more likely time for the beginning of the easing bias.
The Federal Reserve and the Bank of England will meet this week. As we have written in our preview, the Bank of England will likely take into serious consideration what its Chief Economist Huw Pill has said, i.e. that the beginning of the easing cycle could still be “some way off.” The market has interpreted these words by pushing back the time of the first rate cut to August 2024. The Federal Reserve faces a quite persistent inflation pressure deriving from a strong economy and a robust labour market, which could also imply a delay of the first rate cut.
Among the major central banks, the BoJ remains the usual outlier: while all others are thinking to cut rates, it is now preparing the ground for finally exiting its extraordinary easy stance. That might occur as early as in April this year.
