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Leading Central Banks Prepare to Push Back Against Investor Predictions of Rate Cuts

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Leading central banks, including the US Federal Reserve, the European Central Bank (ECB), and the Bank of England (BoE), are preparing to challenge investor predictions of imminent interest rate cuts. Despite expectations that monetary policy will loosen in early 2024 due to falling inflation, the banks are looking for clearer evidence of weakening labor markets before making any rate cuts. The central banks plan to push back against the market narrative and are reluctant to give the green light to rate cuts.

James Knightley, chief international economist at ING, explained that the data is helpful for central banks to counter the market narrative and prevent premature declarations of victory over inflation. The Fed, which is meeting ahead of the ECB and BoE this week, faces a particularly challenging task as investors speculate that it will lower borrowing costs earlier than anticipated to bring inflation down to its 2% target. However, Fed Chair Jay Powell has emphasized that it is premature to say interest rates have peaked or to discuss the timing and parameters of rate cuts.

Recent economic data supports the central banks’ cautious approach. US hiring has remained stronger than expected, with the unemployment rate falling to 3.7% and solid wage growth. Holger Schmieding, chief economist at Berenberg, noted that labor markets are holding up better than expected despite interest rate changes. Additionally, upcoming US inflation data will likely dispel the notion of an imminent policy pivot.

Investors are starting to show signs of wavering, with traders scaling back their bets on rate cuts following the positive economic data. Falling bond yields are a concern for central banks as markets are easing financial conditions earlier than desired.

The ECB and BoE are also meeting this week and are anxious to counter the market’s rate-cutting narrative. Both banks can point to relatively resilient labor markets as evidence against immediate rate cuts. Eurozone unemployment remains near a record low at 6.5%, and unit labor costs per hour worked are rising at the fastest pace in Eurostat records. In the eurozone’s labor-intensive services sector, price growth is still running at 4%, prompting rate-setters to seek more evidence that higher labor costs will not drive further inflation.

In the UK, indicators of wage growth have eased, and headline inflation dropped to 4.7% in October. The BoE is expected to hold rates at 5.25%, the highest since the financial crisis. To prevent further loosening of financial conditions, the BoE is likely to reinforce its “high for longer” message.

Overall, central banks are cautious about making premature rate cuts and are looking for stronger evidence of weakening labor markets and lower inflation before taking action. The upcoming meetings will provide an opportunity for the banks to challenge investor expectations and provide further clarity on their monetary policy decisions.

More detail via The News International here… ( Image via The News International )

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