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HomeTop NewsGlobal hopes for lower interest rates dwindle as inflation persists

Global hopes for lower interest rates dwindle as inflation persists

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Six months ago, the world’s major central banks seemed poised to initiate a move that would delight consumers and businesses alike: a shift to lower interest rates, making borrowing cheaper and loans more accessible.

Federal Reserve Chair Jerome Powell hinted at this in a December press conference, stating that rate cuts were “a topic of discussion.” The mood among investors was optimistic, despite concerns from organizations like the International Monetary Fund (IMF) that cuts might come too soon and hinder efforts to control inflation.

These fears, however, were unfounded. The anticipated joint easing of monetary policy has largely fizzled as central banks grapple with more persistent inflation and stronger-than-expected economic and wage growth.

Although modest steps have been made, such as initial rate cuts by the European Central Bank (ECB) and the Bank of Canada, the overall tone has shifted from “start your engines” to “hold your horses.”

Powell recently noted that the initial move to loosen policy will be “consequential,” with the Federal Reserve now projecting only a single quarter-percentage-point rate cut by the end of the year, down from three projected earlier.

Challenges and Adjustments

Most economists, according to a Reuters poll, now expect only one or two Fed rate cuts this year, compared to four predicted in December. Similarly, predictions for the Bank of England (BoE) and ECB have shifted.

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While the BoE is expected to wait until the third quarter to cut rates, headline inflation remains close to the BoE’s 2% target, but high services sector inflation and strong wage growth suggest rates will stay on hold.

For the ECB, the first cut was correctly forecasted for June, but market expectations for further cuts have decreased significantly. ECB policymakers have cautioned about “bumps in the road” in achieving their inflation targets, with recent political uncertainties in France adding to market jitters.

Managing Expectations

Central banks are balancing the trade-off between inflation control and economic growth. ECB policymaker Mario Centeno highlighted the need for cautious policy to avoid undermining the fragile euro zone recovery, noting that the disinflation story remains intact.

Powell’s remarks in December about progress on inflation fostered expectations of imminent rate cuts. However, recent strict language suggests a careful approach to managing market expectations. Despite data indicating weakening price pressures, investors continue to anticipate rate cuts beginning in September.

Potential Risks

The prolonged restrictive monetary policies pose risks, potentially pushing labor demand down and unemployment higher than projected. Nick Bunker from the Indeed Hiring Lab warned that the labor market, robust over the past two years, might eventually falter under sustained restrictive policies.

As central banks navigate these complexities, the global economic landscape remains uncertain, with the timing and impact of rate cuts continuing to be a critical focus for policymakers and markets alike.

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