On balance, we expect the first BoE rate cut in June, followed by a sustained easing cycle taking rates below 3% in 2025
Paul diggle, chief economist, abrdn
Fed pushing back on expectations for a March cut
The Federal Reserve held rates at 5.25-5.5% for a fourth consecutive meeting.
Chair, Jerome Powell, pushed back on market expectations for a March cut, with the central bank keen to see more evidence of low inflation before easing. The solid growth backdrop also means there is limited urgency to cut rates quickly.
However, the Fed continued to prepare the ground for eventual policy easing, dropping its hiking bias and reiterating that cuts were coming later this year.
We think the first cut will be in May, when the Fed will have three more inflation prints to draw on and growth is likely to have slowed. That’s likely to be the first of many cuts, taking rates back to more neutral levels of 2-3% by late-2025.
A deeply divided Bank of England
The Bank of England’s Monetary Policy Committee (MPC) voted 6-2-1 to keep Bank Rate on hold at 5.25%.
The three-way split in the vote is unusual and suggests the MPC is very divided about the appropriate path of policy.
The Bank removed the long-standing tightening bias in its policy guidance and sharply revised down its near-term inflation forecasts. Inflation is now seen as returning to 2% by the second quarter of this year.
However, the Bank stressed its view that the drop back to 2% is likely be temporary, and revised up its medium-term inflation forecasts.
On balance, we at abrdn expect the first rate cut in June, followed by a sustained easing cycle taking rates below 3% in 2025.
ECB waiting on wage growth to slow
The European Central Bank is perhaps closest to cutting rates given the weakness of the Eurozone economy.
However, policy makers are still concerned about the strength of wage growth, which they worry could drive a new bout of inflationary pressure.
As such, evidence of stable or subsiding wage growth is a necessary condition for a cut. While there will be no official wage data available by the April ECB meeting, policymakers are closely tracking various alternative measures of wage growth.
We think these will provide the scope for the ECB to begin lowering rates by April. Because potential growth is so low in the Eurozone, we see rates eventually falling below those in other major economies.
The Bank of Japan is going its own way
Finally, a notable exception among the major central banks is the Bank of Japan (BoJ), which at its meeting last week appeared to be gearing up to raise interest rates later this year.
Having sat out the post-pandemic hiking cycle entirely, the BoJ is becoming more optimistic about wage growth and an escape from the deflationary mindset in Japan. We think the BoJ will drop its policy of capping bond yields, and remove its negative interest rate policy, by July.
That said, Japan may only be replacing a long period of negative interest rates with a long period of zero interest rates.