Major Central Bank Interest Rate Projections: Who Will Be the Next to Cut Rates?

After two years of major central banks raising interest rates, the global policy rates have remained high for a long time. But with disinflation having taken hold around the world, it is time for central banks to reduce these rates.

The European Central Bank and the Bank of Canada have both cut interest rates in the first week of June, following earlier moves by Switzerland and Sweden. Who will be the next to cut rates?

The Fed has maintained the federal funds target rate at 5.25% to 5.5% since July 2023, and it is expected that the rate will hold steady at the FOMC meeting on June 11 and 12, 2024,

However, just a few hours before the FOMC meeting, the latest snapshot of inflation showed consumer prices increased less than expected in May. The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% over the prior year in May — a deceleration from April's 0.3% month-over-month increase and 3.4% annual gain in prices. Both measures beat economist expectations.

Following the data's release, markets were pricing in a roughly 69% chance the Federal Reserve begins to cut rates by its September meeting, according to data from the CME FedWatch Tool. That's up from about a 53% chance the day prior. The probability of a rate cut in December has risen to 95%.

Although growth, hiring and inflation are likely to cool this year, the U.S. economy will still show enough resilience that the Fed will refrain from reducing rates as aggressively as the European Central Bank, the Bank of Canada and the Bank of England are expected to do, according to Joseph Brusuelas, Chief Economist and Principal at RSM US LLP.

The European Central Bank last Thursday confirmed a widely anticipated reduction in interest rates at its meeting, despite lingering inflationary pressures in the 20-nation euro zone.

It takes the central bank’s key rate to 3.75%, down from a record 4% where it has been since September 2023.

″Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady,” the ECB Governing Council said in a statement.

In updated macroeconomic projections that will be closely analyzed by investors, ECB staff raised their annual average headline inflation outlook for 2024 to 2.5% from 2.3% previously.

“The slight upgrade to the inflation forecast was to be expected, inflation has been printing a little bit hotter than markets were expecting, but in terms of the timing of the next cut I’d still be looking to September,” Dean Turner, chief euro zone economist at UBS Global Wealth Management, said.

The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points to 4.75%, in a widely expected move that marked its first cut in four years, and said more easing was likely if inflation continued to ease.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Governor Tiff Macklem said in his opening remarks after the announcement.

Inflation in Canada has slowed this year to hit a three-year low of 2.7% in April, and all measures of core inflation have also fallen to 3% or below.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Macklem said in an indication of what future reductions could look like.

Source: Bloomberg

Prices in the UK rose by 2.3% in the year to April 2024 - the lowest rate since September 2021.

However, this is still above the Bank of England's 2% inflation target, so it is not yet clear whether the Bank will decide to cut interest rates when it meets in June.

Andrew Bailey said he was "optimistic that things are moving in the right direction" as rates were held at 5.25%. He said the Bank expected inflation, which measures the rate prices rise at, would fall "close" to its target level in the next couple of months. But Mr Bailey warned a cut was "not a fait accompli, it's not a done deal".

Nowadays, financial markets are pricing in a 19% chance of a UK interest rate cut in June and are predicting a 50% chance of a rate cut in September. Economists and traders alike are still forecasting at least two 0.25% UK Interest rate cuts by the end of 2024, with UK rates therefore likely to fall from 5.25% to 4.75% by December.

Source: CNBC, RSM US, Bloomberg, Yahoo Finance