Major Central Banks Pause Rate Hikes, Markets Anticipate Cuts



Key Takeaways

  • Leading central banks recently paused their interest rate hiking cycles in response to softer economic data.
  • Market attention is shifting toward the possibility of rate cuts by central banks, with investors increasingly pricing in reductions.

Central Banks Pause Rate Hikes

In recent weeks, major central banks, including the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England (BoE), have taken a step back from their previous interest rate hiking cycles. This shift in monetary policy comes as economic data signals a softening in economic activity and easing inflation pressures.

U.S. Federal Reserve’s Caution

The U.S. Federal Reserve, under the leadership of Chairman Jerome Powell, chose to maintain benchmark interest rates steady within a target range of 5.25% to 5.5%. This decision marked the second consecutive meeting with no rate changes following a string of 11 consecutive rate hikes that concluded in September.


While Powell has emphasized the Fed’s commitment to addressing inflation concerns, recent data indicates that inflation pressures are moderating. The annual increase in the consumer price index stood at 3.7% in September, down from its peak of 9.1% in June 2022. Despite this, the market interpreted the Fed’s tone as slightly dovish, resulting in positive market reactions.


Market expectations are now turning towards the possibility of rate cuts, with CME Group’s FedWatch tool indicating a 25 basis point reduction by May 1, 2024, and expectations for a total of 100 basis points in cuts by the end of the following year. Key indicators, including softer nonfarm payroll figures and declining core inflation, have contributed to this shift in sentiment.


However, despite the dovish data points, U.S. Treasurys experienced a reversal and sold off, reflecting investor concerns that last week’s narrative about potential rate cuts may have been overplayed. The U.S. economy appears more resilient than the United Kingdom and the Eurozone, with the market pricing in a 16% chance of another rate hike by the Fed.

European Central Bank’s Prudent Approach

The European Central Bank, in late October, concluded its series of 10 consecutive rate hikes, maintaining its benchmark interest rate at a record high of 4%. This decision came in the wake of Eurozone inflation falling to a two-year low of 2.9% in October and a continuous decline in the core inflation figure.


Market expectations are now leaning towards rate cuts by the ECB, with nearly 100 basis points of reductions priced in by December 2024. The first 25 basis point reduction is primarily expected in April. Economic weakness across the Eurozone reinforces the belief that the ECB will be the first to ease its tight monetary policy stance.


Gilles Moëc, Group Chief Economist at AXA, noted that the decline in October’s inflation confirms the disinflation trend in Europe. While the ECB’s prudence in addressing this trend has been evident, the possibility of reaching its target remains uncertain.

Bank of England’s Forward Guidance

The Bank of England, after a period of 14 consecutive rate hikes, recently decided to maintain its primary policy rate at 5.25% for a second consecutive meeting. The Monetary Policy Committee expects rates to remain higher for an extended period, with a view to addressing persistently high inflation. The market is pricing around 60 basis points of rate cuts by December 2024, although they are anticipated in the second half of the year.


Governor Andrew Bailey emphasized the upside risks to inflation projections during a news conference, suggesting that rate cuts are not an imminent consideration. The Bank of England appears to maintain a stance of caution and is not currently contemplating rate reductions in the near term.


While market sentiment points toward potential rate cuts, central banks continue to monitor economic data and assess the balance between inflationary pressures and economic activity. The evolving economic landscape will play a significant role in shaping future monetary policy decisions.