ECB and BOE are reluctant to join US Fed in pivoting towards rate cuts
EUROPE’S central bankers are in no hurry to join the US pivot towards interest-rate cuts – even as investors keep insisting that they will need to embrace easier monetary policy soon enough.
In the wake of US Federal Reserve chief Jerome Powell’s signal on Wednesday (Dec 13) that officials are turning to focus on reducing borrowing costs, peers from Frankfurt to London declared that further slowing in inflation cannot be taken for granted. Whatever financial markets may be betting, they signalled that easing is not on the agenda for now.
“We should absolutely not lower our guard,” European Central Bank (ECB) president Christine Lagarde told reporters, while her Bank of England (BOE) counterpart, Andrew Bailey, observed that “there is still some way to go” in the fight to tame consumer prices.
The BOE, in particular, showed an appetite to stick with tight monetary policy, as three of nine rate-setters even voted for another hike. In Oslo, Norges Bank went further to defy the global mood and actually delivered an increase.
That left the end-of-2023 monetary state of play on Thursday as one where an end to tightening in Europe was cemented, but officials there seem happy for US colleagues to take the lead downward – much as the Fed beat its eurozone counterpart to raise first in 2021.
“The ECB has been lagging behind the Fed anyhow,” said Carsten Brzeski, global head of macro at ING, told Bloomberg Television. “We will see more of a cyclical downswing in the US which will allow the Fed to really do these rate cuts next year, while we didn’t fly high in Europe, now we’re slowing down again.”
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While investors are still betting on cuts in Europe that central banks will not endorse, after the combined messages from Powell, Lagarde and Bailey, traders are beginning to align to a timetable where the Fed goes first.
Markets imply a much bigger chance of a March reduction from the Fed than from the ECB, with the latter expected to begin easing in April. Both are seen delivering at least 150 basis points of moves next year – equivalent to six quarter-point cuts.
The repricing towards more loosening followed quarterly projections from the Fed showing officials expect to lower rates by 75 basis points in 2024 – a sharper pace than indicated in September.
“For the time being, it’s only the words of Jay Powell that carry any weight,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.
That is what central bankers in Europe soon encountered, even as they were not prepared to shift as far as their US colleagues.
Lagarde displayed less concern about consumer prices, unveiled forecasts that point to a “flatter” profile for inflation, and heralded a wind-down of pandemic bond purchases that could pave the way to easing.
While she insisted that the Governing Council “did not discuss rate cuts at all”, policymakers are largely united in expecting to lower borrowing costs later than investors currently anticipate, according to officials familiar with their thinking.
“Market participants understandably remain sceptical that the ECB will be able to maintain their relatively hawkish stance for long,” said Lee Hardman, a currency strategist at MUFG. “The longer the ECB keeps rates at current restrictive levels, the more likely it runs the eurozone economy into the ground.”
Also on Thursday, Swiss officials called an end to tightening and even signalled a shift away from selling foreign currency – but reducing rates did not come into the equation either.
While their Norwegian peers raised one more time, the message there was one where another move upwards is not part of the plan. The policy rate “will likely be kept at 4.5 per cent for some time”, Governor Ida Wolden Bache said.
Perhaps most hawkish was the BOE, which stuck with guidance that it could hike again at a time when UK inflation is more elevated than in either the euro area or the US. While traders were pricing a quarter-point cut in May and four more next year following on Wednesday’s Fed decision, they pared back only one of those after the UK outcome.
“Markets have to form a view,” Bailey acknowledged in an interview with broadcasters, noting “encouraging signs” on inflation. Even so, “it’s really too early to start speculating about cutting interest rates”, he said.
Global wagers are behind such rate bets, said Hugh Gimber, global market strategist at JPMorgan Asset Management.
UK pricing is being “driven much more by changes in expectations for the Fed and the ECB rather than anything in the domestic data that would justify such a move”, he said. “We do expect the bank to lower interest rates in 2024, but only once there are clearer signs of the labour market loosening.”
Similarly, the ECB is watching corporate profitability and ongoing negotiations over wages before forming a firm view over the inflation dangers, according to Lagarde.
“They really first want to be sure, to see inflation really down at 2 per cent, which implies that they will be late in cutting rates,” said Brzeski. “There is a big risk they will be behind the curve actually twice in one cycle, on the way up – and now also on the way down.” BLOOMBERG
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