In line with our views at the start of the year, the shift towards lower interest rates has begun. The Fed has stepped up with a larger rate cut than originally expected and seems determined to ensure that the US manages to have a soft landing. This may put pressure on other central banks, but the key is that disinflation and low growth should be supportive of monetary loosening to continue into the first half of 2025.
The Fed delivered a 0.50% rate cut and set out the case for two further cuts this year, with some members seemingly supportive of another 0.50% in November. The recent inflation data will remain supportive of further monetary loosening. Another 0.50% may be on the cards if the labour market were to loosen further and imply a risk of a recession. Overall, market expectations seem correctly priced, anticipating the Fed Funds at 3% by mid-2025. The Bank of Canada cut rates by 0.25% for a third time and have pointed to further loosening in coming months in the face of below-trend growth and a weaker labour market. Market expectations seem realistic with a further 1.75% of rate cuts by mid-2025.
There is gathering evidence that the European Central Bank (ECB) is being too cautious in cutting rates given the economic backdrop of inflation reverting to target and waning economic confidence. The market is rightly pricing in a further 0.50% reduction by the end of the year.
The Bank of England (BoE) is also lagging given the tepid growth rates and the downside risk on inflation. It seems that there is hesitancy due to wage growth (the recent public sector pay rises will not have been helpful), the Office of Gas and Electricity Markets (Ofgem) energy price cap increase and the stickiness of service sector inflation. The BoE probably also wants to digest the late October budget. The market is discounting just one rate cut this year, but rates are set to fall to 3.75% by mid-2025.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q4 2024 here.
