Interest Rates Archives

Are Global Markets Facing a New Period of Volatility?

Written by IntaCapital Swiss on August 16, 2024. Posted in News & Reports. Leave a Comment

On Monday 5^th August 2024 trading rooms in financial centres across the world faced one of the most volatile and chaotic days in recent history. In the United States by the close of business on Monday The MSCI (Morgan Stanley Capital International) All Country World Index (ACWI) was showing 90% of stocks had fallen, in what has been termed as an indiscriminate global sell-off. In Tokyo the Nikkei was down 12%, in Seoul the Kospi was down by 9% and at the opening bell in New York the Nasdaq plunged 6% in seconds. However by the Thursday evening of that week the turmoil in the markets had been forgotten as the S&P and ACWI were both down by only 1%.

But what brought about this huge summer sell-off? Many financial experts suggest that financial markets had convinced themselves that a soft land for the US economy was a given especially after what was perceived as a successful fight against inflation, with interest rates being kept high by the Federal Reserve. However, the moves in the markets were completely off the scale in relation to what actually triggered the sell-off. Analysts suggest the touchpaper was lit when two economic updates were published in the first two days of August 2024, plus a further announcement by the Bank of Japan (BOJ) that they were raising interest rates.

The first set of data was a survey of manufacturing, which was closely followed by official data released regarding the state of the US labour market. When taken together analysts suggested that instead of a soft landing, the US economy was indeed heading for a recession, and that unlike the Bank of England and the European Central Bank (ECB), the Federal Reserve was moving too slowly on interest rate cuts. The data released on new jobs, which was by no means the worst of the year, fell short of expectations of being only 114,000 as opposed to the expected figure of 175,000.

The start of the sell-off began in the Asian markets on Monday 5th August, as a stronger yen and rising interest rates in Japan combined with the bad economic data coming out of the United States. A vast number of market players and investors have been tied up in the “Yen Carry-Trade”*, where advantage has been taken of low interest rates in Japan allowing investors to borrow cheaply in Yen and invest in overseas assets especially in large US tech stocks and Mexican bonds. A number of traders felt the Yen carry trade was the “epicentre” of the markets and the unwinding of these trade caused the shakeout that followed.

*Yen Carry Trade – For many years cheap money has been in Japan where interest rates have held at near zero. Any investor, bank, hedge fund etc can, for a small fee, borrow Japanese Yen and buy things like US tech stocks, government bonds or the Mexican Peso which have in recent years offered solid returns. The theory to this trade is that as long as the US Dollar remains low against the Yen investors can pay back the Yen and still walk away with a good profit.

The sell-off also hit the Tokyo Stock Exchange which recorded its sharpest fall in 40 years, whilst the VIX** also known as the “Fear Gauge” hit a high of 65 (only surpassed a few times this century having enjoyed a lifetime average of circa 19.5), implying the markets expect a swing of 4% a day over the next month in the S&P 500. Analysts announced that when trading hit its peak it was very reminiscent of the 2007 – 2009 Global Financial Crisis, but without systemic risk fears. A well-known Japanese equity strategist suggested “The breath and the depth of the sell-off appeared to be driven a lot more by extremely concentrated positioning coming up against very tight risk limits”.

**The VIX – is a ticker symbol and the in-house or popular name for the Chicago Board Options Exchange’s (CBOE) Volatility Index. This is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.

In the last four years Yen carry trades have been very popular as Japan has been essentially offering free money keeping interest rates at almost zero to encourage economic growth whilst the United States, the United Kingdom and Europe were raising interest rates to fight inflation. For many, borrowing at next to nothing in Japan and investing in a US Treasury Bond paying 5% or Mexican Bonds paying 10% seemed like a no brainer. However, once the market fundamentals of this carry trade started moving towards negative territory the global unwinding of these trades was an inevitability.

The market makers were always in evidence throughout the sell-off, suggesting that the structure of the markets were still in place. However, experts said that the biggest moves on the VIX were driven by a tsunami of investors all moving in the same direction. As one senior executive put it “there was no yin and yang of different views”, it was just one way traffic. However, the rebound on the following Thursday just highlighted the lack of fundamental clarity where, as one expert put it “The market is so fascinated by what is the latest data point that the ties between day-to-day stock price moves and fundamentals are more disconnected than ever before”.

There have, however, been undercurrents in the background indicating a shift in current trends, and with unnerving global politics from the United States to the Middle East plus continued rumblings from China over Taiwan, volatility in the markets is ever present. Add to this US growth trending downwards and market/investor concern over stretched valuations in the US tech market, taken together with other factors including the fourth consecutive move south in the S&P and the VIX trending higher, a negative move in the markets could have been anticipated. So, whilst the fundamentals were in place to be interpreted by market experts, it was the data points and the unwinding of the Yen carry trades that kicked off the volatility swings.

Looking back from today (Friday 16th August) it is as if the volatility and single day crash never happened, however a number of experts suggest that markets could remain volatile until the Federal Reserve interest rate decision in September. Many renown commentators have said what happens in the United States does not stay in the United States, especially as the country has been a major driver of global economic growth, so if the United States does go into recession the world as a whole would suffer. Analysts also suggest that there are further Yen carry trades to unwind which will impart volatility into the markets. In the short-term, therefore, it would appear volatility is on the menu especially with an uncertain presidential election in November. Long term volatility is difficult to predict, but the markets will now be aware that when there is consensus thinking e.g. a soft landing for the US economy and all is rosy in the garden, markets can quickly turn on their heads and bite you very badly.

Has the Federal Reserve Left it Too late?

Written by IntaCapital Swiss on August 15, 2024. Posted in News & Reports. Leave a Comment

On the 6^{th of} June 2024 The European Central Bank (ECB) cut their interest rates by 0.25%, the Bank of England followed suit on the 1^{st of} August 2024 lowering their interest rates by exactly the same percentage points. However, the US Federal Reserve’s Federal Open Market Committee (FOMC) on the 31^{st of} July announced they were once again holding interest rates steady at 5.25% – 5.50% where they have now sat since July 2023. The last time the Federal Reserve cut interest rates was in March 2020, but all eyes are now on the FOMC meeting in September where financial markets and experts are expecting the Federal Reserve to announce a rate cut.

The mood coming out of the Federal Reserve suggests a cooling economy with data showing rising unemployment and moderating job gains. This suggests that the Federal Reserve may well indeed cut rates at their September meeting, but a weakening economy in some cases can spiral into a recession by feeding off itself. So, has the Federal Reserve left it too late to cut interest rates? Economists and financial experts alike remind us that the United States avoided a predicted recession in 2023, which may have resulted in favourable predictions that the US economy would enjoy a soft landing in 2024.

However, the Federal Reserve may have misinterpreted data in a favourable manner due to Q2 enjoying unexpected increased growth figures of 2.8%, which was taken as evidence that the US economy was indeed in good shape. Some analysts have looked beyond this figure and suggest the economic growth has been propped up not only by government spending (which has been backed up by a sizeable deficit) but also by excessive hiring in the public sector. Warning signals such as the ISM Manufacturing New Orders Index* (a bell weather signal for past recessions) is showing signs of decline, in the week ending July 2024 jobless claims rose to an eleven month high and plethora of companies who are consumer focused recently recorded earnings figures misses.

*ISM Manufacturing New Orders Index – This index, which is sometimes referred to as the “Purchasing Managers’ Index”, is considered a key indicator of the current state of the US Economy. It indicates the level of demand for products by measuring the amount of ordering activity at the nation’s factories.

Other warning signals come from the New York Federal Reserve who are suggesting that there is a better than even chance of a recession appearing at some stage in Q3 and Q4. Such predictions are based on “the curve over time of bond yields”* though this has been an unreliable indicator in the past. Experts at a major New York investment bank suggest that the mean or median optimum interest rate (based on a number of monetary policy rules) should be 4%. Yet the Federal Reserve chose not to cut interest rates despite inflation in June coming close (within 0.5%) to their benchmark target of 2%.

*The curve over time of bond yields – If the yield curve is flattening , it raises fears of high inflation and recession. In the event of yield curve inversion this “EVENT” is viewed as the likelihood of the US economy slipping into recession. An inverted yield curve occurs when short-term yields on US Treasuries exceed long-term yields on US Treasuries. This occurred on June 14^th, 2024, when the yield for a 10-year treasury was 4.2% and the yield for a 2-year treasury was 4.67%.

Experts suggest that an economy does not slow down in an undeviating manner and, unless checked, an economy can lose economic momentum and spiral out of control into recession. That means that any pricing by the financial markets for a soft landing can quickly go out the window. There are enough warnings out there for the Federal Reserve to take their foot off the brake on interest rate cuts, but will they lament not having cut interest rates in July when the FOMC meets in September.

Bank of England Cuts Interest Rates: Aug 2024

Written by IntaCapital Swiss on August 15, 2024. Posted in Blog Article, News & Reports, Uncategorized. Leave a Comment

On the 1^{st of} August 2024 the Bank of England (BOE) cut interest rates by 25 basis points to 5% making this cut the first of its kind since March 2020. The BOE has held interest rates steady at 5.25% since August 2023 in its on-going battle against inflation. The vote to cut interest rates was a knife-edge decision, with members of the Monetary Policy Committee (MPC) voting five to four in favour of cutting interest rates. It was the governor himself who cast the deciding vote whilst the chief economist of the BOE Mr Huw Pill voted against a rate cut. Financial markets had expected an interest rate cut because, for the second month in succession, inflation held steady at the BOE’s target of 2%.

The Governor of the BOE Andrew Bailey said that inflationary pressures had eased to the extent to allow the Bank to finally cut interest rates, but he went on to warn the markets and general public that they should not expect large rate cuts in the forthcoming months. The Governor went on to say, “Ensuring low and stable inflation is the best thing we can do to support economic growth and prosperity of the country”. This cut will be a boost for the new Labour Government as they attempt to revive a stagnating economy and improve living standards.

Whilst inflation fell back to 2% in May 2024 the BOE is still very concerned that prices still remain high and, in fact, are significantly higher than three years ago and sadly are still rising. The BOE remains worried that the service sector still has problems with stubborn price increases and resilience in wage growth. As for the future, the MPC advises that over the upcoming months inflation will probably rise to 2.75%, overshooting the benchmark set by the BOE of 2%. However, the BOE appears confident and have forecasted that inflation in 2026 will fall to 1.7% with a further drop of 0.2% culminating in an inflation figure of 1.5% in 2027.

Analysts have noted that the MPC has adopted a change in guidance, the key change being the wording on the “ importance of data release on wages and growth and service prices” have been dropped, but they did go on to say that they are closely monitoring the risks of inflation persistence. The recent announcement by the government of a public sector pay increase will, according to Governor Bailey, have little effect on inflation and the impact of other changes in policy would depend on how they were funded. These uncertainties combined with the hawkish stance by the MPC have left analysts confused, saying that current BOE policy is highly ambiguous, and they do not appear to be in a rush to cut rates again anytime soon.

Federal Reserve Holds its Benchmark Interest Rate

Written by IntaCapital Swiss on July 8, 2024. Posted in Blog Article, News & Reports. Leave a Comment

On June 12^th, 2024, the FOMC (Federal Open Market Committee) for the seventh straight meeting, once again held its benchmark interest rate steady at 5.25% – 5.5%, which is the highest level it’s been for over twenty years. Whilst Chairman Powell dialled back expectations for rate cuts this year saying the latest forecasts were a new conservative approach, financial markets suggest that there may be two rate cuts this year with the first cut possibly coming in September. However, policymakers have advised that instead of three rate cuts in 2024 as previously advised, they now only expect to make one rate cut in 2024.

On the same day before the FOMC meeting CPI (consumer price index) figures were published, reflecting better than expected data which is cause for optimism in the future. Chairman Powell was quoted as saying the “numbers are encouraging” and suggested that the latest CPI figures may not have been fully taken into account by the latest quarterly projections. He went on to say that although the committee were briefed on the CPI figures, most individuals do not update projections when data arrives in the middle of policy meetings. His words were jumped on by many leading experts who suggested that the door is still wide open for two rate cuts in 2024.

Officials of the Federal Reserve raised their outlook for inflation in the longer term to 2.8%, up 0.2% from their March 2024 estimation and still above their target of 2%. However, experts suggest the Federal Reserve is still trying to come to terms as to the appropriate time to cut interest rates, as there is uncertainty regarding tight monetary policy and the impact it is having on the economy. Despite high borrowing costs, consumer spending and job growth have been particularly resilient even though inflation remains above 2%. Chairman Powell has been quick to point out the split within the committee where the “Dot Plot”* showed eight officials expecting 2 rate cuts, seven expecting one rate cut and four expecting zero rate cuts.

*Dot Plot – This is a graphical display consisting of data points on a graph which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.

Experts suggest that chairman Powell is content to leave interest rates unchanged until the economy sends a clear signal such as a jump in the unemployment rate or further declines in the CPI. However, with the Federal Reserve’s eyes on the PCE index (Personal Consumption Index), nothing is really as it seems.

European Central Bank Finally Cuts Interest Rates

Written by IntaCapital Swiss on July 8, 2024. Posted in Blog Article, News & Reports. Leave a Comment

On June 6^th 2024 the ECB (European Central Bank) announced a cut in interest rates of 25 basis points to the deposit rate lowering it from 4.00% to 3.75% as headline inflation is now just above its 2% target having fallen from 10% in 2022. Inflation has largely come down due to lower fuel costs and supply chains, which have now become normalised after a few post Covid-19 twists and turns.

However, the ECB advised that inflation is not yet beaten as the service sector remains sticky and as a result the ECB announced that “despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.” The decision to lower interest rates was nearly unanimous with the only negative vote coming from Robert Holzman, Governor of the Central Bank of Austria.

The President of the ECB Christine Lagarde hedged her bets when answering questions regarding future rate cuts. She is quoted as saying “ Are we moving into a dialling back phase? I would not volunteer that. Is the dialling back process underway? There’s a strong likelihood”. A number of experts have described her message as somewhat confusing, especially as she added “We are not pre-committing to a particular rate path”. Experts and analysts alike suggest that another rate cut in July is now unlikely, with financial markets now focusing on September 2024.

Last month the President Lagarde declared inflation under control, however with the lack of a clear path on rate cuts being offered by the ECB the string of recent data has pointed the finger at enduring price pressures. This alone would suggest that the ECB is going to be, as with other central banks, data driven prompting cautions when talking about future interest rate cuts. Together with a quarterly outlook published by the ECB forecasts for inflation will average 2.2% for 2025 up from an earlier forecast of 2%.

Elsewhere the Bank of Canada reduced its benchmark interest rate but both the Federal Reserve and the Bank of England are fighting tougher price pressures, and are only expected to follow suit in the coming months. Financial markets are waiting for some clear signs from both the Bank of England and the Federal Reserve as to when they expect to cut rates.

The Financial Markets Got It Wrong Predicting a US Dollar Decline in 2024

Written by IntaCapital Swiss on June 21, 2024. Posted in Blog Article, News & Reports. Leave a Comment

As 2024 started many investors, experts and analysts predicted that the US Dollar would decline. However, the greenback, thanks to a very hot US economy, and an inflation problem ensuring the Federal Reserve will not cut interest rates for the time being, means a strong dollar has returned and does not look like it is going away. Furthermore the IMF (International Monetary Fund) has predicted that growth in the United States will grow at a rate of two times that of the remaining members of the Group of Seven, and with geopolitical tensions at a height not seen for decades, the US Dollar is still viewed as the ultimate safe haven.

Many economists and other analysts are predicting that the US Dollar will continue to grow, with one well-known bank suggesting the dollar will continue to increase in value through 2025. The resurgence of the dollar has come on the back of many financial signals pointing to the US economy sidestepping a much anticipated slowdown, with manufacturing continuing to grow and the labour market remaining tight, plus as already mentioned, the forecast of interest rate cuts being put back due to inflationary problems.

The financial markets have scaled back their bets on an early cut in US interest rates which has resulted in soaring benchmark treasury yields hitting a figure of nearly 5% which has been a major factor in the US Dollar’s appeal. The dollar has also been further driven by the demand for AI (Artificial Intelligence) resulting in massive inflows into the relevant US Stocks. One senior asset manager has been quoted as saying “The dollar is such a high yielder, if you are a global allocator and running your portfolio, what a slam dunk to improve your risk-adjusted returns: buy shorter-term US debt, unhedged.

The US Dollar during times of financial and or political instability is still recognised as the ultimate investor sanctuary, and as such with the current geopolitical turmoil investors have been seeking refuge in the greenback. This was proved last Friday 19^th April, where there was a surge of US Dollar buying following Israel’s retaliatory strike on Iran. Indeed, experts suggest that whilst there has been a surge in US Dollars due to geopolitical risks, its strength will probably last well beyond the current conflict. Analysts also advise that high treasury yields coupled with American energy independence will more than likely continue to retain the greenbacks appeal to the financial markets and investors alike.

Bank of England Interest Rates. Will They or Won’t They?

Written by IntaCapital Swiss on June 18, 2024. Posted in Blog Article, News & Reports. Leave a Comment

This month on June 20^th the Bank of England’s MPC (Monetary Policy Committee) will meet and decide whether or not to keep interest rates on hold. At the last meeting of the MPC in May, interest rates were held at 5.25% for the sixth consecutive month and are still at their highest level since the Global Financial Crisis 2007 – 2009. The Bank of England’s target figure for inflation is 2% and in April it dipped to 2.3% which is a significant difference to March’s figure of 3.2%.

However, experts in the financial markets had expected CPI (Consumer Price Index a common measure for headline inflation) for April to come in at 2.1%. However an important element in core inflation (does not include figures from food and energy sectors) came in at 5.9% in April down only 0.1% from March. All the above figures are supplied by the ONS (Office of National Statistics).

At the May meeting of the MPC Governor Andrew Bailey indicated that June may see a cut in interest rates though it is not a “fait accompli”, whilst also advising that like other central banks any cut in interest rates will be data driven. In mid-May financial markets suggested that an interest rate cut in June was circa 60% as measured by the overnight index swaps*, but since the release of the April inflation figures in late May that suggestion of an interest rate cut has subsided mainly in part due to sticky service inflation figures.

*Overnight Index Swaps – This is a financial bet on the direction of short-term interest rates and is a type of interest rate swap. In this case, it is typically a fixed for floating swap, where one party pays a fixed rate and receives the floating rate (linked to an overnight index) while the other party does the opposite. The overnight index for sterling is known as Sonia (replaced sterling Libor) and stands for Sterling Overnight Index Average.So will the Bank of England cut interest rates on June 20^th? A number of experts suggest that an interest rate cut may not happen as the services sector inflation remains a problem and came in a lot hotter than market analysts predicted. Many experts feel that services inflation remains a critical part of the Bank of England’s thinking regarding inflation and interest rate cuts, and therefore the MPC may well decide to once again hold rates on June 20^th.

United Kingdom Interest Rates: May 2024

Written by IntaCapital Swiss on May 21, 2024. Posted in Blog Article, News & Reports. Leave a Comment

Interest rates reached 5.25% in August 2023 and have held steady ever since.

Once again on 9^th May 2024, the MPC (Monetary Policy Committee of the Bank of England, BOE), held rates steady at 5.25%. A number of experts and analysts felt that the Bank of England would cut interest rates this time around, but data showed that inflation was stickier than otherwise predicted. A rate cut is still expected this year, but the timing may have just been kicked slightly down the road. Interestingly, the Deputy Governor of the Bank of England along with external member Swati Dhingra voted for an immediate cut in a 7 – 2 split favouring keeping interest rates steady

However, the Governor of the Bank of England, Andrew Bailey, has given the clearest hint yet that interest rates may soon be cut by indicating that he feels the financial markets have under-priced the pace of easing in the coming months. The governor further advised that before the next meeting on June 6^th, there are two rounds of data regarding inflation and wages which will be highly important regarding any rate cut. Governor Bailey went on to say, “It’s likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates”.

Whilst the governor was not actually confirming that 6^th June will see an interest cut saying that date is “neither ruled out or a fait accompli’, this is the first time he has addressed investors/financial markets directly regarding expectations on future interest rate cuts. After the governor’s comments, traders priced in a 25 basis point as 50/50 in June but have fully priced in a cut in interest rates in August. The markets are now suggesting that there will be 59 basis points cut in 2024 as opposed to early suggestions of 54 basis points.

By the end of the second quarter, officials in the Bank of England feel inflation will be down to 2% (Bank of England target) due mainly to lower energy bills. These officials have further advised that they expect inflation to rise slightly throughout Q3 and Q4 but at a gentler pace than previously expected, though they warned geopolitical factors might negatively impact inflation. Interestingly, a number of experts and economists have advised that inflation may well fall below the target figure of 2% by the end of Q2, forcing the Bank of England into cutting interest rates.

Interest Rates Remain Unchanged in Europe, America, and the United Kingdom

Written by Barclay Butler on April 2, 2024. Posted in News & Reports. Leave a Comment

The European Central Bank

On the 7^{th of} March 2024 the European Central Bank (ECB) kept interest rates on hold for the fourth meeting in succession, the deposit rate of 4% remaining unchanged. The consensus coming out of the Governing Council is that keeping borrowing costs unchanged for a sufficiently long period means that their target inflation number of 2% will be more easily accessible. Indeed, the President of the ECB Christine Lagarde advised that inflation is definitely slowing down but remains sceptical of lowering interest rates at this time.

President Lagarde went on to say that further data in the coming months, especially by June, should give the ECB a clearer picture regarding a drop in interest rates. Like the Bank of England and the Federal Reserve, the ECB is considering when to announce that inflation is beaten and start the process of unwinding their unprecedented monetary tightening policy. However, like their peers the Federal Reserve and the Bank of England and despite Presidents Lagarde’s coyness on a June 2024 interest rate cut, the indications from the ECB are that a June interest rate cut is in the offing, and as a result money markets are indicating three/four interest rate cuts by the end of the 2024.

The Federal Reserve

On the 20^{th of} March 2024 the Federal Reserve’s FOMC (Federal Open Market Committee) announced that they are holding the benchmark federal funds rate steady at 5.25% to 5.50% for the fifth consecutive meeting. However, officials signalled that they remain confident that rates will be cut in 2024 for the first time since March 2020 and they also revised downward their December 2023 forecast of four interest rate reductions in 2025 to three interest rate reductions. Whilst the Federal Reserve has seen inflation fall from a high of 9.1% in July 2022, the figure sadly ticked up slightly in February 2024 due to the cost of clothes, car insurance, airline fares, gas, rent and shelters.

Post-meeting statements/comments were nearly identical to those made at the post meeting interviews in January 2024, being that rate cuts will not be made until the Federal Reserve is more confident that inflation is moving towards the 2% target. Experts have predicted that interest rate will be cut three times this year but there are doubts as recent data shows inflation is slowing and remains at 3.2%, meanwhile financial analysts and traders are betting that the first interest rate cut will be announced this June. Chairman Jerome Powell reiterated his vow to keep interest rate elevated as the fight against inflation continues.

The Bank of England

The Bank of England’s MPC (Monetary Policy Committee) on the 21^{st of} March 2024, maintained Bank Rate at 5.25% by a majority vote of 8 to 1 as official data released showed that inflation had receded to 3.4%, its lowest level in over two years. However, whilst headline inflation has been receding rapidly, the Bank of England is very aware of prices in the service sector and wages where price growth is still in excess of 6%. The Governor of the Bank of England Andrew Bailey was quoted as saying “Britain’s economy is moving towards the point where the Bank of England can start cutting interest rates”. Interestingly within the 8 to 1 majority and for the first time since September 2021 none of the MPC members voted for a rate hike, and two hawks (Jonathon Haskel and Catherine Mann) became part of the no-change majority with Swati Dhingra being the one vote for a cut in interest rates.

When asked the question ‘Were investors correct to price-in two to three rate cuts in 2024?’, Andrew Bailey replied “It is reasonable for markets to take that view”, while stressing that he would not confirm or endorse the size or the timing of the cuts. As a result experts within the financial markets have raised their bets for a first cut in June 2024 as Governor Bailey confirmed that the UK was on the way to winning the battle against inflation. Interestingly, Chancellor of the Exchequer Jeremy Hunt has alluded to an October 2024 general election, so in order to avoid criticisms of bias towards the government and to assert their independence, any interest rate cuts will have to be made sooner rather than later.

Interest Rate Overview: Eurozone, United States, United Kingdom February 2024

Written by IntaCapital Swiss on February 7, 2024. Posted in Blog Article, News & Reports. Leave a Comment

As predicted by many commentators, the governing council of the ECB (European Central Bank), the Federal Open Market Committee (FOMC) of the United States Federal Reserve and the Monetary Policy Committee (MPC) of the Bank of England, all kept interest rates on hold. All three central banks cited the continuing fight against inflation as the reason for keeping interest rates on hold, but as many experts are predicting, interest rates will fall in 2024 in all three jurisdictions.

The Eurozone

On Thursday 25^th January the Governing Council of the ECB announced for the third time in a row that interest rates were being held at a record high of 4%, reaffirming their fight against inflation. Many traders and analysts in the financial markets are betting on a rate reduction at the next Governing Council meeting on April 11^th, 2024.

However, Governor Christine Lagarde announced it was “premature to discuss rates”, though some unnamed members of the council have added that if upcoming data shows that inflation is beaten, then the April meeting could be dovish for a fall in interest rates at the June meeting. Despite these utterances, many in the financial markets believe the ECB have got it wrong and will be forced to cut interest rates in April.

The United States

On Wednesday January 31^st, 2024, the Federal Reserve kept policy rates at a 22 year high of 5.25% – 5.50%, where the Chairman of the Federal Reserve Jerome Powell gave a massive endorsement on the economy’s strengths. He further advised that with the on-going expectation of falling inflation, coupled with economic growth, that rates had now peaked and would fall in the coming months. However, despite this pledge, Chairman Powell went on to say that he did not expect a rate cut at their next policy meeting in March, as they wish to see on-going positive data on the reduction of inflation to their figure of 2%.

Interestingly, the Federal Reserve is hoping to accomplish beating inflation through tighter credit without putting the economy into recession, which historians suggest they only accomplished once in the last 100 years. But with inflation falling more quickly than expected, (2.6% as at close of business 2023), the Chairman is coming under political pressure to reduce rates in March.

A massively divided country is going to the polls in November to elect a new president, and Chairman Powel received written requests to reduce interest rates from Senator Elizabeth Warren (Dem, former presidential candidate), and Senate Banking Committee Chair Sherrod Brown (Dem). Some market experts are suggesting that there is a circa 63% chance that the Federal reserve will cut interest rates in March, but with seven weeks of economic data to come the markets will have much to mull over.

United Kingdom

On February 1^st, 2024, the Bank of England’s MPC announced that it was holding interest rates steady at 5.25%, admitting that a rate cut had been part of their discussions. In the end there was a split decision in the MPC with six members in favour of holding, two members voting to increase rates and one member voting for a drop in interest rates. Interestingly, this is the first time since the Covid-19 pandemic that a rate-setter has voted for a cut in interest rates, and the first time since the global financial crisis of 2008, that there has been a three-way split in the MPC.

Following the announcement, The governor of the Bank of England Andrew Bailey announced that “the level of bank rate remains appropriate, and we are not yet at a point where we can lower rates”. He also pointed out that there is an upside risk to inflation due to continuing trade disruptions, and ambiguously advised how long policy remains restrictive depends on incoming data. However, experts suggest that the Bank of England is now warming to rate cuts in 2024, with officials believing that consumer price inflation will be at 2% in the second quarter, mainly due to falling energy prices., a year earlier than forecasted last November.

Market analysts mainly agree that whatever the statement that comes out of the above central banks, interest rates are set to fall in 2024. It would appear that the Bank of England is set to lag behind the ECB and the Federal Reserve when it comes to cutting interest rates. However, better than expected January US employment figures may delay a US interest rate cut beyond March, and as to whether or not they all fall at the same time, only time will tell.

Tag: Interest Rates