January 22, 2024 (MLN): The pivot by central banks to policy rate cuts in 2024 will be geographically widespread but it will not be steep. Rates at the end of this year will still remain far above pre-COVID-19 pandemic levels, says Fitch Ratings in its latest Economics Dashboard.
Following recent falls in inflation and dovish Fed commentary, Fitch expects no further rate rises from the Fed, ECB or Bank of England (BOE) in this tightening cycle and each bank to cut by 75bp by end-2024.
The change in interest rate direction will be widespread, with central banks in 19 out of 20 economies in the Global Economic Outlook expected to cut this year. Only the Bank of Japan is expected to raise rates.
A diffusion index of the share of global central banks tightening policy reached historical highs in late 2022 but the index will fall well below the ‘neutral’ 50 mark this year.
The geographical breadth of rate cuts will be impressive but their size and speed will be modest relative to the aggressive hikes of the past two years, leaving rates well above pre-pandemic levels.
The rise in policy rates in the recent tightening cycle was extremely rapid by historical standards, with the Fed and BOE hiking by 525bp and 515bp, respectively, from the trough in 2021, and the ECB by 450bp.
Fitch only expects cumulative cuts from the Fed, BOE and ECB of 200bp, 175bp and 150bp, respectively, by the end of 2025 and does not expect Fed rate cuts before June or July 2024.
Fitch expects a slower pace of rate cuts than financial markets, which currently anticipate around 150bp of cuts by the Fed and ECB and around 115bp from the BOE by end-2024.
This reflects their view that sticky wage and services price inflation will make central banks cautious about cutting too quickly.
