The European Central Bank (ECB) and the Bank of England (BOE) are set to follow the lead of the Federal Reserve by maintaining interest rates at their current levels this month. Both institutions will announce their decisions on Thursday, and economists predict that they will opt for stability. As part of their updates, the ECB will provide forecasts for inflation and growth, which will offer investors insights into the timing of future rate adjustments.
Throughout 2023, the ECB and BOE have closely monitored the actions of the Fed, adjusting borrowing costs to some extent but not fully matching the moves made by their U.S. counterpart. Now, the question arises as to how their paths might diverge in 2024.
At present, the U.S. economy appears to be stronger than its European counterparts. Recent data revealed an unexpected contraction in U.K. output for October, while Germany's economy, which is the largest among the eurozone nations, experienced a decline in the third quarter. In contrast, the U.S. economy saw its fastest growth in almost two years during the July-September period.
Although inflation rates are declining across all three economies, the extent of the drop varies. In October, the U.K.'s inflation rate stood at 4.6%, significantly higher than the 3.1% rate in the U.S. Meanwhile, the eurozone's inflation rate is currently at 2.9%. All three central banks share a common objective of maintaining inflation around 2%.
George Buckley, an economist at Nomura, noted that despite the euro area and U.K. weathering the economic challenges thus far, ongoing weaknesses in surveys suggest that both countries might experience mild and short recessions. Buckley predicts rate cuts in June 2024 for the ECB and August for the BOE; however, market expectations indicate that these reductions could come sooner.
During its recent decision, the Fed remained open to various possibilities. Chairman Jerome Powell stated that officials believe the policy rate is likely at or near its peak for the current tightening cycle. The Fed's forecasts anticipate three quarter-point rate reductions in the coming year. Market projections point towards the first Fed rate cut around May.
