Which Central Bank will be the first to lower the Interest Rates?

Recently, in collaboration with partner Ebury , we set up a poll to find out which bank you expect would be the first to cut interest rates. The results (623 votes!) are in, are these expectations in line with the developments we are currently seeing? We thank speakers Harry Mills , Matthew Ryan, CFA , Peter Post and moderator Patrick Kunz, FRM QT for a great live session regarding this topic!

Poll Results

In partnership with Ebury, this poll garnered a staggering 623 votes, a record!

Question: Which Central Bank will be the first to lower the Interest Rates?

Results:

• The Fed (405 votes, 65%)
• European Central Bank (ECB) (113 votes, 18%)
• Bank of England (BoE) (105 votes, 17%)

First observation

The majority of treasurers (65%) believe that the Federal Reserve will be the first central bank to lower interest rates. This could be due to the fact that the US economy is currently the strongest among major economies, and the Fed has been more aggressive in raising interest rates than the ECB or BoE.

However, a significant minority of treasurers (18% and 17%) believe that the ECB or BoE will be the first to lower rates. This suggests that there is still some uncertainty about the outlook for inflation and economic growth in Europe.

So what to expect and what do to? We discussed this in our recent live version. Read the recap here.

View of the treasuryXL expert

Harry Mills, FX Risk Management expert

"I would have preferred the poll to have an "I have no idea" answer, as that might have made an impact"

Can I understand these poll results? Yes, as a function of Fed noise in that, most commentators talk about the Fed the most and, we hear from Fed policymakers the most. In truth, the Fed came to the party in raising rates several months after the BoE and months before the ECB but, they went bigger and, inflation has eased more quickly in the US than in the UK.

Each central bank is faced with a unique set of circumstances to deal with but, arguably the main issues can be distilled to:

• Fed: The economy continues to run hot, defying expectations. As time goes on, this may well be labeled as a 'soft landing' but, for now, with underlying inflation above target, the Fed will see signs of strong demand in the economy as a reason to hold rates at the peak for an extended period of time. That's the "higher for longer" phrase we keep hearing.
• ECB: The European Central Bank is surely done with rate hikes now that the deposit rate is at a record high of 4%. The issue in Europe is growth, with Germany and the eurozone as a bloc slipping into contraction in the third quarter.?
• BoE: Persistent inflation and anemic growth or, "stagflation" as is the economic term. 800,000 UK mortgages will have rolled off low-interest rates and into higher rates by year-end, so there may well be more economic pain to come

What's the upshot?

In my view, the Fed may well have to hold rates for the longest to control inflation in an economy that continues to run hot and defy gravity. The ECB could well be the first to cut if the trend in inflation continues. The BoE has a tough task ahead with inflation well above target. But, as we've seen before, a lot can happen in 3-6 months so, it's really anyone's guess.?

I would have preferred the poll to have an "I have no idea" answer, as that might have made an impact. Perhaps people picked The Fed because, as I state, they hear most from them. Realistically, we can't properly assess today all of the economic factors that may or may not play out over the coming 8-9 months – I pick this timeframe because I think we'll see rate cuts in Q2, but I could very easily be wrong.

Either way, we shall see in the fullness of time.

For those who missed the live session, watch the recap and recording here.

Would you like to explain your own vote for this poll? Join the discussion in the comments. And vote now on the current poll!