Forecast about when the Fed, ECB and BoE will cut interest rates

The Fed, ECB and BoE all paused interest rates at their most recent meetings. The market predicts that in 2024, all three will cut interest rates to varying degrees, despite the cautious attitude of policymakers.

According to CNBC, the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) have all paused their interest rate hike cycle in recent weeks when many data showed that see the economy is weakening.

The market is now turning its attention to when these banks will make their first interest rate cuts.

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Fed may lower interest rates in May 2024

On November 1, the Fed kept the federal funds rate in the range of 5.25% to 5.5%. Chairman Jerome Powell still reiterated that the Fed has not yet achieved its inflation target of 2%, but the price increase rate has decreased significantly compared to the period last June.

Although Mr. Powell did not rule out the possibility of the US central bank continuing to raise interest rates, the market implicitly understood that the agency's tone had shown signs of being more dovish.

According to CME Group's FedWatch tool, the market currently expects the Fed to cut interest rates by 25 basis points (bps) for the first time at its meeting on May 1 next year. In 2024, the market forecasts the Fed will cut interest rates by a total of 100 bps. CME relies on the price of federal funds rate futures contracts to make forecasts of future interest rates

Before and after the Fed made the decision to keep interest rates unchanged, a series of data showed that the economy was showing signs of weakness. “The delayed effects of a cooling housing market will reinforce disinflation over the next few months,” analysts from DBRS Morningstar noted.

However, US Treasury bond yields continued to rise earlier this week. Mr. Jim Reid, strategist at Deutsche Bank, said that investors are "wondering whether the story about a possible interest rate cut last week went too far." The US economy is also proving more resilient than Britain and the eurozone. The market is still expecting the Fed to raise interest rates with a probability of 16%, up from 11% on November 3.”

In addition, the interest rate forecast for the December 2024 meeting has increased to 4.47%. There has therefore been a reversal, albeit only partial, from last week's moves. Strategists also emphasized that this is the 7th time in this interest rate hike cycle that the market expects the Fed to cut interest rates. And in all six previous times, hope was quickly dashed.

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ECB is likely to act before the Fed

At the end of October, the ECB also ended the series of 10 consecutive interest rate hikes. One of the three key policy interest rates in the eurozone is at a record high of 4%, while inflation in October was 2.9% - the lowest level in 2 years and core inflation also continues to cool down.

The market is also predicting that the ECB will lower interest rates by nearly 100 bps until December 2024. However, the first 25 bps reductions are expected to come in April next year, as the bloc's economy is showing many signs of weakness.

Gilles Mo?c, chief economist at AXA, said October's inflation figures confirmed and amplified the message that "deflation has come to Europe", helping to explain "recent caution" of the ECB.

Mr. Mo?c commented, "Waiting for inflation to reach 2% before cutting interest rates is too long and clearly the current data is favorable to the doves. But the hawks are far from giving up the fight.”

After the October meeting, ECB President Christine Lagarde rejected the proposal to cut interest rates, but National Bank of Greece Governor Yannis Stournaras publicly discussed the possibility of a cut in mid-2024 with stable inflation below 3%.

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BoE is still the most cautious

One day after the Fed ended its policy meeting, the BoE also decided to keep interest rates unchanged at 5.25%.

However, the BoE meeting minutes reiterated the UK Monetary Policy Committee's (MPC) expectation that interest rates will need to remain high for longer. Inflation in September in the UK remained at 6.7%.

The market is predicting interest rates will be cut by about 60 bps in December 2024. However, it will not be until the second half of next year that the BoE will make a move to adjust policy.

BNP Paribas economists said in the MPC forecast there was an addition that “monetary policy may need to tighten for an extended period”.

BNP Paribas said Governor Andrew Bailey's remarks at the press conference showed that the MPC's forecast was not intended to negate market predictions about when the BoE would start lowering interest rates. Instead, according to economists, Mr Bailey's aim was to indicate that the BoE would not be discussing interest rate cuts anytime soon.

Author: Edwin Thinh Vu

Editor: Raouf Boussaoui

8 Nov 2023