Interest Rate Cuts Will Not Happen Immediately, Central Banks Warn

Policymakers want to make sure the inflation monster is really dead. 

If you have been waiting for interest rates to drop, it will probably take more time than you expected. 

Heading into 2024, central banks in several countries have decided to leave their benchmark rates where they are. Even when they say cuts are coming, they want to make sure that inflation is well and truly under control first. 

The Reserve Bank of India will not even discuss interest rate cuts until inflation stays at 4%, one governor said in an interview. 

The European Central Bank kept rates unchanged at its meeting in late January. While acknowledging that inflation has continued to recede, the ECB said that it planned to keep rates “at sufficiently restrictive levels for as long as necessary.” 

The Bank of England decided to hold steady in January, too. As did the Bank of Canada, but its discussion has shifted from whether it needs to raise interest rates to when a cut would make sense.

At its Jan. 31 meeting, the US Federal Reserve decided to keep the federal funds rate around 5.25% to 5.5%, where it has been since July 2023. 

“Inflation has eased from its highs without a significant increase in unemployment,” Fed Chair Jerome Powell said. “That is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain. I want to assure the American people that we are fully committed to returning inflation to our 2% goal.”

Why interest rate cuts are expected in 2024

To be fair, it is not unreasonable to expect cuts at some point. In December, the Fed predicted it would reduce interest rates at least three times in 2024. 

Meanwhile, inflation — the main driver behind the recent run of rate hikes — has eased considerably since 2022. The euro zone, for example, recorded year-over-year inflation of 2.9% in December and the European Union hit 3.4% YoY, close to its target rate of 2%, which would theoretically allow policymakers to start reducing interest rates.

That expectation has helped drive the stock market higher and higher in recent months. And that makes sense: Lower interest rates could spur more economic growth by reducing the cost of borrowing, which in turn would allow businesses to expand and consumers to purchase big-ticket items such as homes and vehicles. 

Instead, policymakers have steadily pushed back against the idea that cuts will be coming rapidly. Reducing interest rates too quickly or too deeply could reignite inflation. Central bankers have no desire to cut rates and then be forced to raise them again a few months later. Nor do most want inflation to settle above the 2% target that most nations operate under.

Central bankers may also be mindful of recent reversals in inflation. In December, for example, inflation hit a four-month high in India because of higher food and fuel costs. The US and Canada also experienced upticks in inflation. 

When will interest rate cuts happen in 2024?

• In its most recent forecast, the Organisation for Economic Co-operation and Development says that rate cuts should not occur until “well into 2024” and inflation is “durably reduced.” Headline inflation has eased in most economies, but core inflation is still high. Meanwhile, there are still a number of geopolitical risks — such as the war between Israel and Hamas and a trend toward more restrictive trade policies — that could drag down economic conditions.
• The Bank of England could make its first cut of 25 basis points in May, then continue making further cuts at each meeting into 2025, according to Goldman Sachs. An economist with JP Morgan predicts that a cut won’t happen before August. 
• Traders are pushing the idea of an April rate cut by the European Central Bank, though policymakers say they’re still waiting for inflation to settle firmly at 2%.
• In the US, Fed Chair Powell downplayed the idea that a cut could happen at the Fed’s next meeting in March, though some market watchers haven’t given up hope yet. The next opportunities for cuts could come in May or June.
• Canada will probably cut rates in June or later, according to a Reuters survey of economists, though a minority said a decrease in April might be possible.

The bottom line on interest rate cuts

It’s entirely possible that unexpected trends could interfere, but right now, policymakers are generally open to the idea of rate cuts sometime this year. They’re no longer talking about the potential need to raise rates further. Instead, they’re explaining what needs to happen for rates to be reduced. 

And maybe it’s just tough talk, but if those policymakers can be believed, then cuts are unlikely in the first quarter. Late spring may be the earliest that rates begin to roll back — assuming that inflation trends continue moving the right way.  

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