Yahoo Finance Central bankers push back on interest rate cut bets but accept progress on inflation
Central bankers have pushed back against the market expectation that interest rates will be lowered in a matter of months, while admitting that the “next move will be a cut”.
Interest rates in both the US and the eurozone stand at their highest levels since the financial crisis, after a run of aggressive rate hikes.
But as inflationary pressures have waned, investors have grown increasingly confident that central banks will soon unwind their historic bout of monetary tightening.
In the eurozone, inflation stands at 2.9 per cent, down from a peak of 10.6 per cent in October 2022. US inflation meanwhile ended 2023 at 3.4 per cent, down from over nine per cent in June 2022.
This has forced central bankers to tread a difficult balance between acknowledging the progress that has been made on tackling inflation while tempering some of the more exuberant market bets.
Markets think that the ECB could cut rates as early as March, but this week rate-setters have suggested this might be premature. Speaking to Bloomeberg TV today, Christine Lagarde, president of the ECB, said that market optimism “is not helping our fight against inflation”.
Asked whether interest rate cuts would begin by summer, as some of her colleagues have suggested, Lagarde said “it’s likely” but added that she had to be “reserved”.
“There is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them,” she said.
European markets fell following the comments, with the DAX trading 0.9 per cent lower while the CAC lost 1.1 per cent.
Her comments come after a number of fellow ECB rate-setters have pushed back against the market view. Joachim Nagel, president of the Bundesbank, said on Monday that “it’s too early to talk about cuts, inflation is too high”.
French central bank chief Francois Villeroy de Galhau meanwhile refused to speculate on the timing, even while admitting that “our next move will be a cut”.
“This question is premature because we’re not guided by a calendar but by data,” he said.
In the US, traders think there is a 60 per cent chance that the Fed will lower interest rates in March, according to CME Fedwatch.
Like in the eurozone, however, Fed officials have suggested that a spring cut may be too early. On Tuesday, Governor Christopher Waller said rate cuts were likely this year if inflation “does not rebound and stay elevated”.
However, he said there’s “no reason to move as quickly or cut as rapidly as in the past”.
No rate-setter at the Bank of England has discussed rate cuts in 2024, meaning there is little guidance to their current thinking.
However, a surprise rise in inflation in December last year – which took the headline rate up to four per cent – has forced markets to reassess the timing of the first rate cut. They now think the Bank Rate will start being lowered in June rather than in May.
The next meeting of the Monetary Policy Committee takes place on 1 February.
