Many central banks’ rate cuts will keep coming

Unsurprisingly, as central banks push policy rates down towards levels they regard as ‘neutral’ so their language changes and they start to sound more cautious. However, some reticence also seems to be down to the fact that some central banks are finding that progress in lowering inflation has stalled.

In the US, Fed Chair Powell introduced some two-way risk into the December FOMC meeting by saying that a cut is not a foregone conclusion. The market-implied probability of a 25-bps rate cut on December 10th has come down to around 65% from over 100% before the November FOMC meeting. That’s still above a 50:50 chance, and we stick to our view that the Fed will cut rates next month.

Most probably there will be more of these pushbacks from Fed members from time to time as they seek to avoid being railroaded into rate cuts by the market. However, the Fed will have its work cut out because even if the Powell-led Fed acts in a very cautious way with respect to rate cuts in the run up to the end of Powell’s term next May, the market will anticipate that Powell’s replacement will deliver the cuts when they take over. So, even if the market has started to question the possibility of a 25-bps cut next month, the terminal fed funds target rate in this cycle is seen unchanged at around 3%.

This being said, much will depend on the economic data. For if employment improves and inflation rises a new Fed chair might find it difficult to take rates down as much as the market expects, and perhaps as much as the new Fed chair would like to see.

Nonetheless, the Standard Bank thinks that 3% is a likely destination but retain concerns that the Fed may go too far at a cost of higher, not lower, bond yields at the longer end of the curve. In addition to this, the potential fiscal cost of Supreme Court failure on tariffs, as discussed over the page, may only serve to lift yields further and we continue to think that 10-year yields could reach 5% over the coming year in spite of any Fed rate cuts down to 3%. Moreover, it thinks it very possible that the terminal fed funds rate will not be in place for very long; especially if it is as low as 3%. For with inflation not defeated we see a significant risk that the Fed will have to revert to rate hikes again in 2027.

The Bank of England is another central bank whose caution over rate cuts has frustrated the market somewhat. Last week’s decision to leave rates unchanged breaks the quarterly cycle of rate cuts that has been in place since August 2024, but we should only have to wait until the next meeting on December 18th for the Bank to take rates down another 25-bps.

In the Standard Bank’s view, the delay is largely on account of the November 26th budget. As Governor Bailey said at last week’s post-meeting press briefing, the Bank can only take account of announced government policy, not policy speculation. But if Chancellor Reeves announces fiscal consolidation of up to GBP50bn, as speculated, it looks like a done deal that rates will be cut. It has already seen how consumer and business apprehension about tax hikes has curtained confidence and activity in the past and, in our view the Bank – and the government – should not allow it to take a grip again after the November budget.

The Bank of England has been cutting rates against the backdrop of rising inflation. Other central banks have found that the path to their inflation target has been bumpy. The RBA hit a big bump in Q3 when annual inflation jumped back above the top of the 2-3% target range at 3.2%. “While some central banks like the Fed and BoE still seem content to cut rates, the RBA continues to suggest that it might have come to the end of the road on easing. The market seems to concur as no more rate cuts are fully priced from here. We believe that this is too cautious; that the jump in prices will prove temporary and that the RBA will be able to cut rates by another 25- bps, if not 50-bps in this cycle”, said Standard Bank.