Are some central banks considering lowering their rates?

BoE Chief Economist Pill said that the market might be right to think that the Bank of England can start to cut rates from next August.

>> Major central banks are close to end tightening cycle

We are constantly being told by central bankers, such as Powell from the Fed and Bailey from the Bank of England that the idea of a rate cut is not even on the radar screen. It is as if they want to give the impression that they have not even thought about when rates can be cut. They are doing this so that market expectations are contained and financial conditions don’t ease up. But BoE Chief Economist Pill rather let the cat out of the bag on Monday by saying, in an admittedly qualified way, that the market might be right to think that the Bank can start to cut rates from next August.

As far as we are aware it’s the first comment that we’ve had from a senior central banker that appears to corroborate current market pricing. As said, Pill did qualify this by the infamous “ceteris paribus” (which means everything else remaining equal) assumption economists often use. In his case, Pill evoked the ceteris paribus line to argue that rates might be cut in August next year if nothing much changes between now and then – but it probably will. Here’s a case of Pill having his cake and eating it. If rates are cut next August, he can say, ‘I told you so’, but if they are not he can argue that conditions have changed. The importance of this for the market is that it offers real support to current pricing; something that has not been clear before now.

For instance, if we look at the forecasts for inflation presented by the BoE in last week’s monetary policy report, we see that inflation is still forecast to be some way above the 2% target through next year given that the Q4 2024 prediction is for 3.1%. What’s more, we should not forget that these CPI forecasts are conditioned on market pricing of future base rates. The impression the market seemed to get last week was that the forecast of inflation still being above target next year might have outlaw the very rate cut that was part of the conditioning assumption on rates. But that might not be the case given Pill’s apparent validation of this conditioning assumption that a cut could occur from next August.

>> Any risks from an easing cycle ahead of major central banks?

In the US, FOMC members offer their own individual forecasts and these have implied rate cuts in 2024. The last median projection from the Fed in September was that rates would be cut 50-bps in 2024, albeit only after a 25-bps rate hike before the end of 2023. The forecast for lower rates in 2024 offers some hope to those anticipating rate cuts and possibly some relief to ailing stocks and bonds. But, at the same time, there are other central banks out there that forecast future rates but are not prepared to suggest that reductions can happen as soon as next year.

Here we are thinking about some of the Scandinavian central banks such as Norway’s Norges bank or Sweden’s Riksbank. Most other developed-country central banks offer no such forecasts and their language also seems to be governed by the principal that they should not even talk about rate cuts at this stage. One such bank is the ECB. But even here, Mr. Steve Barrow, Head of Standard Bank G10 Strategy, senses that many members are champing at the bit to start talking about lowering rates. Admittedly, these are the more dovish members. But, even so, our sense is that if the UK money markets are sensible in assuming rate cuts from next August, a good number of ECB officials will privately think that the market is justified in pricing in rate cuts from the bank as early as next June.

“The ECB does not forecast inflation falling to the target level next year as its September forecast put 2024 CPI inflation at 3.2%, and 2.9% in core terms. But rather than be some sort of “inflation nutter” to quote former BoE Governor King, and refuse rate cuts until the inflation target is met, the indications from the ECB – and indeed other central banks – is that 2024 will be a year of rate cuts even though inflation will likely lie above target levels”, said Mr. Steve Barrow.