The western world’s largest central banks are poised to keep interest rates on hold this week amid concerns over stubbornly high inflation, despite growing expectations for sharp cuts in borrowing costs next year.
In a crunch week for the global economy, the US Federal Reserve, Bank of England (BoE) and European Central Bank are expected to keep interest rates at their current restrictively high levels to ensure inflation continues to fall back from the highest levels in decades.
However, financial markets are expecting interest rates to be cut next year amid cooling inflation and as high borrowing costs weigh on economic growth, raising the prospect of recessions on both sides of the Atlantic before key elections.
“Their core message is likely to be similar. Good progress has been made towards reducing inflation, but they cannot afford to be complacent,” said Raphaël Olszyna-Marzys, an international economist at J Safra Sarasin Sustainable Asset Management.
Trading in financial markets reflects the probability of up to 1.4 percentage points of cuts by the Fed and the ECB by the end of 2024, according to the investment bank Nomura, while expectations have intensified for the BoE to cut rates by nearly one percentage point.
Policymakers at Threadneedle Street have indicated UK interest rates will need to be kept at the current level of 5.25% for an extended period in response to persistently high inflation in the UK, talking down the prospect of rate cuts anticipated by financial markets.
Andrew Bailey, the Bank’s governor, said last month it was “far too early to be thinking about rate cuts”, while warning there was “no room for complacency” on inflation despite a fall in the consumer price index from 6.7% in September to 4.6% in October.
Jerome Powell, the US Fed chair, also warned earlier this month it would be “premature to conclude with confidence” that the world’s most powerful central bank had achieved a sufficiently restrictive stance to tame inflation. “We are prepared to tighten policy further if it becomes appropriate to do so,” he said.
Figures from the US labour market on Friday showed the world’s largest economy added 199,000 jobs in November, up from 150,000 the previous month. Central bank bosses have been closely watching jobs market data for signs that wage growth is cooling to levels consistent with their 2% inflation targets.
Figures from the UK jobs market on Tuesday are expected to show annual growth in average weekly earnings slowed in the three months to October to 7.7%, down from 7.9% in the three months to September.
Jagjit Chadha, the director of the National Institute of Economic and Social Research, said central banks were using a “wait and see” approach to guard against inflationary pressures becoming entrenched.
“We’ve basically done the heavy lifting. Now it’s a question of seeing how the economy responds to that as inflation pans out,” he said.
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However, surveys indicate economic growth is slowing across advanced nations as households and businesses feel the pinch from a sustained increase in living costs and higher interest rates weighing on their spending power.
City economists predict official figures due on Wednesday will show Britain’s economy sank into reverse in October, with a fall in gross domestic product of 0.1% expected, down from growth of 0.2% in September.
Inflation in the eurozone has fallen back to within striking distance of the ECB’s 2% target, dropping to 2.4% in November, while Germany’s economy is heading for a recession amid a wider regional slowdown.
“September, when it was still all about hikes, seems years ago,” said Ruben Segura-Cayuela, Europe economist at Bank of America.
“Central banks seem happy enough with disinflation progress. But from there to cuts, the path is still long.”
