Rate cuts on the horizon?

It looks like the long-awaited global rate-cutting cycle might finally be starting. Some central banks, like the Bank of Canada and the European Central Bank (ECB), have already made their first rate cuts in recent weeks. The Federal Reserve (FED) is expected to follow soon, especially after the recent three good inflation readings and a softening labor market in recent months.

In June, the Bank of Canada became the first G7 nation to cut rates, reducing benchmark borrowing costs by 25 basis points to 4.75% and promising more cuts to come. The European Central Bank followed just a day later, also cutting rates but projected slightly higher inflation for the future.

At the start of the year, financial markets expected six rate cuts from the FED and other central banks. However, stronger-than-expected US economic data and stubborn inflation made investors reprice those expectations. The resilience of the US economy has given the FED confidence to adopt a highly data-dependent approach for the timing of the first rate-cut.

In Europe, the conditions have been different. Policymakers are becoming more confident in their inflation predictions due to less volatile inflation data. They are also less concerned about currency depreciation. This confidence allowed the ECB to cut rates in June, even with mixed signals from recent wage and CPI data and a persistent high-interest-rate environment in the US.

Market pricing is always changing, but currently, futures tied to US Federal Funds suggest a full rate cut at the September meeting and more cuts this year and next. At the beginning of the year, a rate cut in March was also fully priced in, but three months of bad inflation reports and strong US economic data changed that. Hopefully, this time the markets are right, and we will see policy easing from the FED fairly soon.