Financial markets are currently anticipating that the US Federal Reserve, Bank of England, and European Central Bank will maintain their interest rates next week, though some surprises may still arise.
Despite central banks’ persistent message of maintaining higher interest rates, economists and traders are increasingly expecting rate cuts next year, with predictions for such cuts growing weekly.
Each central bank is expected to resist, to varying extents, the market’s anticipated number of rate cuts.
The European Central Bank (ECB) is particularly in focus this week, as it is perceived to be leading the charge in rate reductions next year, despite the Federal Reserve’s significant market influence.
US Federal Reserve
The Federal Open Market Committee (FOMC) meeting on Wednesday is likely to result in a third consecutive decision to keep rates unchanged, reinforcing the widespread belief that US interest rates have reached their peak.
Currently, the market predicts a 125 basis-point reduction in rates throughout 2024, ending the year around 4.0%, though economists are more cautious, as per the latest Reuters poll.
The December FOMC meeting will update the committee’s economic projections and the ‘dot plot’ chart, which could signal a shift from a hawkish to a more dovish stance in the Fed’s communication.
Last month’s meeting indicated a shift towards slower growth and signs of disinflation, challenging the credibility of a continued hawkish stance. However, US policymakers are not expected to fully transition from a rate-hiking to a rate-cutting bias just yet.
Bank of America suggests that the upcoming meeting might start to balance the committee’s policy rate outlook, with Wells Fargo also anticipating a hint towards less likelihood of further rate hikes.
Key US economic data releases next week include CPI inflation, producer prices, retail sales, and flash PMIs.
Bank of England
The Bank of England (BoE) is also expected to keep rates steady in its Thursday meeting.
The UK market’s rate cut expectations are less aggressive compared to the Fed and ECB, aiding the pound’s strength. Investors foresee three rate cuts next year, starting in June, fewer and later than the ECB.
Despite this, BoE Governor Andrew Bailey has resisted the notion of imminent rate cuts. Barclays predicts continued hawkish rhetoric from the Monetary Policy Committee (MPC), though some, like EY Item Club’s Martin Beck, argue for a policy shift due to easing inflation and pay growth.
The UK’s macroeconomic data for the week includes unemployment figures, GDP, trade and industrial production data, RICS house prices, GfK consumer confidence, and flash PMIs.
European Central Bank
The ECB is also not expected to alter its policy in its Thursday meeting.
Market expectations have shifted significantly regarding the ECB’s actions next year, with five to six cuts now anticipated, possibly starting as early as March. This change is driven by rapidly declining inflation and slowing economic growth.
Deutsche Bank, expecting a dovish shift from the ECB, predicts an initial rate cut in April, with a significant chance of a cut in March.
If the ECB lowers its inflation and growth forecasts, it could reinforce investor beliefs about impending rate cuts, as pointed out by Pictet economists.
In summary, while central banks are expected to maintain rates in the immediate future, market expectations and economic indicators suggest a shift towards rate cuts in the coming year.
