Bloomberg Economics estimates that total interest rates worldwide will fall 128 basis points this year, mainly from emerging economies, typically Brazil and the Czech Republic.
The US Federal Reserve is the agency that will lead the policy pivot to more developed economies. The Fed has signaled a 75 basis point cut in 2024, marking a major shift from its previous tightening intentions.
Others, such as the European Central Bank (ECB), have been more cautious in signaling a cut, with Bloomberg Economics still expecting the first easing to come in June. The Bank of England (BOE) is expected to ease mid-year.
Japan remains the outlier, with Bank of Japan (BOJ) Governor Kazuo Ueda expected to tighten policy by exiting negative interest rates.
In emerging economies, Argentina and Russia are poised to push for sharp rate cuts, while Mexico’s central bank, which has previously resisted, is also expected to start easing, according to Bloomberg Economics.
“Central banks are looking for a victory lap as inflation returns to target, which markets will welcome. But the reality is that the impact of tightening is fading. Another point worth noting is that anti-inflation tools can be risky,” said Tom Orlik, global chief economist at Bloomberg Economics.
The plan to cut interest rates depends on the slowing of inflation. Many argue that prices are still rising, so further interest rate increases are needed.
However, both headline and core inflation readings continued to cool, led by commodity prices, followed by the services sector.
Bloomberg Economics predicts the US Federal Reserve will cut interest rates from 5.5% to 4.25% this year. The first cut is expected in May. While Fed officials have been easing, they have left the door open for tightening. Much depends on upcoming economic data. Chairman Powell and his colleagues have stressed that the Fed will proceed “cautiously” – suggesting the Fed is in no rush to ease. The Fed is considered to be at the end of its tightening cycle.
Across the Atlantic, the European Central Bank is expected to cut interest rates from 4% to 3.25% this year. Unlike the Fed, Fed officials have offered little guidance on where they are headed. While inflation has fallen more than expected, concerns remain about wage growth in the EU. That will be clear by the second quarter. The question now is whether Europe can avoid recession or not.
Among the G7, the Bank of Japan is expected to raise interest rates from -0.1% to 0% in 2024. The market's current question is just when the BOJ will implement the new policy.
“The BOJ is in no rush to adopt a new policy. It needs clear signals from wage data that inflation is back to its target. The transition to a new policy will take place in the second half of 2024, most likely in July,” predicted Taro Kimura, an expert at Bloomberg Economics.
The Bank of England is expected to cut interest rates from 5.25% to 4%, although Governor Andrew Bailey stressed that it was too early to consider a change in policy. There is growing speculation that the BOE will have to abandon its long-term plan to keep interest rates high. The BOE is likely to lower its inflation forecasts at its next meeting on February 1. The UK economic picture is starting to look positive.
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