Central Banks’ Rate Decisions to Test Market Expectations for 2024 Cuts

Major central banks are set to make their final rate decisions of the year in a crucial week that will challenge market expectations for rate cuts in early 2024. The week begins with the U.S. Federal Reserve, followed by a “Super Thursday” featuring the European Central Bank (ECB), Bank of England, Swiss National Bank, and Norway’s Norges Bank.

Key Points:

  1. Market Expectations vs. Central Bank Guidance: Investors expect central banks to keep interest rates steady, except for Norway, which signalled a likely rate hike in December. Market expectations, particularly in the U.S., favour rate cuts in 2024, challenging central banks’ guidance.

  2. The Federal Reserve’s Divergence with Market Expectations: The Federal Reserve is expected to hold rates at 5.25%–5.50%, but traders are pricing in a 25-basis point cut in March 2024. Fed Chairman Jerome Powell has cautioned against premature speculation, emphasising the need to balance policy and respond appropriately.

  3. Risk to “Risk-On”: Analysts highlight the potential risk to “risk-on” sentiment if the Fed diverges from market expectations. The discrepancy raises questions about the credibility of the Fed and the accuracy of market predictions.

  4. ECB’s Focus on Disinflation: Eurozone inflation dropped to 2.4% in November, the lowest in over two years, fueling expectations of rate cuts in 2024. Policymakers caution that addressing disinflation could be challenging, and rate cuts may take longer than anticipated.

  5. Deutsche Bank’s Forecast: Deutsche Bank brings forward the timing of the first ECB rate cut to April, citing recent inflation data and official commentary. According to analysts, there is a “significant risk” of a rate cut as early as March.

  6. Pantheon Macroeconomics’ View: While the consensus expects the first ECB rate cut in June 2024, Pantheon Macroeconomics believes March is a viable option. The divergence between market expectations and central bank actions remains a key theme.

Conclusion:

This week, the central banks’ decisions and statements will have significant implications for global markets, especially regarding the timing and direction of interest rate changes. The tension between market expectations and central bank guidance underscores the challenge of navigating monetary policy in a complex economic environment. Investors will closely scrutinise central bank communications for insights into future policy directions and potential impacts on financial markets.

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