Global central banks adjust their strategy 

By the end of 2023, global central banks were poised to initiate significant interest rate cuts. However, as the year progresses, persistent inflation and economic resilience led to a reassessment of these expectations. In this context, we share some of the perspectives they recently conveyed to the markets.

Federal Reserve (Fed):

• Revised projections: Fed Chairman Jerome Powell noted earlier this year that initial projections of multiple rate cuts were too optimistic. The new expectation is for only one or two rate cuts by the end of 2024, rather than the three previously anticipated.

• Economic resilience: Despite inflationary pressures, the U.S. economy and labor market showed resilience, which implies closer monitoring prior to implementing cuts. 

European Central Bank (ECB):

• Monetary policy tightening: The ECB recently made a modest rate cut, although it emphasized a cautious perspective due to continued inflation and economic uncertainty. In particular, its members warned of “bumps in the road” as they navigate these challenges.

• Geopolitical concerns: Events such as French President Emmanuel Macron’s decision to call early parliamentary elections added uncertainty, influencing market expectations and possible forward-looking decisions by the ECB. 

Bank of England (BoE):

• Rate cuts delayed: The BoE postponed on several occasions the anticipated rate cuts, which could materialize in the third quarter of the year, in line with consensus forecasts. This is despite a significant reduction in headline inflation, as steady wage growth keeps the BoE cautious.

As can be seen, the desired 2024 monetary easing cycle has lost momentum, largely due to persistent inflation, particularly in sectors such as services and robust economic activity. Central banks have therefore found it necessary to recalibrate their strategies to a more cautious approach, which could involve more gradual adjustments to short-term interest rates, so that this move allows them to bring inflation consistently toward their long-term targets.

Expectation for the monetary policy of Central Banks in Developed Countries

Source: Capital Group

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