Fed, ECB And BoE: Ready For Interest Rate Cuts In H2 2024?

With July already under way, we have entered the second half of 2024. The first half of the year wasn’t in line with forecasts with some central banks such as the Federal Reserve, the European Central Bank and the Bank of England taking more time than expected to adjust their monetary policies or even hesitating to move forward with cuts. Although at the end of the previous year, economists were forecasting more drastic measures, inflation and wage hikes with stubbornly low unemployment rates weighed on policymakers’ decisions in the first six months of 2024.

By reading our article, you will have the opportunity to get a brief overview of how monetary policies were adjusted in the first half of 2024 and some forecasts for the next six months until the end of the year.

Federal Reserve: Will It Cut Rates In H2 2024?

At the end of 2023, some market analysts had forecast that the Federal Reserve would lower its unprecedently high interest rates by May or June, looking at three or four rate cuts for the whole year. Their forecasts were based on the downward inflation trajectory observed in the second half of 2023, showing that the tight monetary policy implemented by the Fed had been starting to keep consumer prices’ growth in check.

However, the first months of 2024 revealed that forecasts were probably more optimistic than they should have been. Headline inflation remained above the Fed’s 2% target while jobs reports showed a hot labour market with the number of new jobs created exceeding expectations.

As a result, the Fed’s Federal Open Market Committee (FOMC) preferred not to engage in rate cuts that would likely feed inflation figures. On June 12th, the FOMC announced that it would keep borrowing costs on hold for the seventh consecutive time. Fed Chair Jerome Powell said that FOMC members were content to leave interest rates where they are until the economy sends a clear signal such as a decline in price pressures or the unemployment rate’s growth.

According to an ING report published on July 5th, the unemployment rate rise recorded in June and jobs reports revisions the chances of a September interest rate cut from the Federal Reserve continues to build. The report mentions that “our concern is that business surveys are pointing to intensifying weakness in the months ahead – both in terms of cooling economic activity and weaker job creation – and this may lead the Fed to cutting rates more rapidly. We look for three cuts this year versus the two cuts currently priced by markets with the Fed funds down at 4% by next summer.”

European Central Bank: Rate Policy Remains Data-Dependent

The European Central Bank (ECB) faced the same issues as the Fed when it comes to interest rates. Last year’s optimism for the unwinding of the strict monetary policy did not materialise in the first half of 2024. The ECB’s governing council had to deal with the low inflation drop rate as well as the slowdown of the euro bloc’s economy. Despite the ECB’s efforts that include keeping rates at the highest levels recorded in many years, wage growth remained elevated, signaling that the 2% inflation target is not so close as initially thought.

On June 6th, the central bank announced its decision to lower its benchmark interest rate by 25 basis points for the first time in five years. While the decision was forecast by market analysts, it should be noted that it was one of the few times that the ECB cut rates earlier than its US counterpart who traditionally tends to lead the way in monetary policy changes. The ECB head, Christine Lagarde, has clarified that future decisions will depend on financial reports and data coming from the bloc.

The ECB minutes that were released some days later showed that “there was a case for keeping interest rates unchanged” as “wage growth had surprised to the upside and inflation seemed to be stickier, mainly on account of services.” Board members mentioned that “a small undershooting of inflation would be much less costly than a continued overshooting, especially as the anchoring of inflation expectations should not be taken as given.”

ING analysts suggest that “at the same time, there appears to be growing confidence in the ECB's staff economic projections by the Governing Council. Those projections remain rather optimistic on disinflation by end-2025 and will  in our view justify two more rate cuts by the ECB this year. Market pricing is less dovish, at 38bp.”

A report by PoundSterling Live said that “economists at Berenberg expect a September cut to be followed by a pause for the remainder of the year as fresh base effects temporarily lift inflation again in late 2024. The central bank is then expected to cut interest rates twice, taking the deposit rate to 3% by mid-2025.”

Bank of England: Rate Cut In August?

The Bank of England (BoE) has had an even more difficult path to cross in the last twelve months with high inflation figures fueling a political crisis that led to a change of guard in Downing Street 10 after the July 4th parliamentary elections. The BoE’s implementation of strict monetary policy helped control and bring down inflation to lower levels; for example, prices in the UK rose by 2% in the year to May 2024, down from 2.3% the month before, and the lowest rate recorded in almost three years.

The BoE  kept interest rates unchanged after its Monetary Policy Committee (MPC) meeting on June 20th. Currently, its benchmark interest rate stands at 5.25%, the highest level recorded in the last sixteen years, unchanged in the last eleven months. BoE’s policymakers wrote in the post-meeting statement that “remain restrictive for sufficiently long to return inflation to the 2% target sustainably.” However, some market analysts suggested that the wording used in the statement was more “hawkish” than in May, indicating that a rate reduction could be in the papers.

Despite the on-hold approach by the BoE’s in its last monetary policy meeting, economists at ING noted that policymakers are getting closer to interest rates reductions despite some recent unfavourable services inflation figures, adding that “the Bank has generally been more reluctant than the European Central Bank to pre-commit to a course of action ahead of time. But it's clear the committee is getting closer to the point of cutting rates. Assuming the next inflation report in mid-July doesn't contain any nasty surprises, we still think the Bank will vote for a rate cut in August.”

Forecasting the future of the BoE’s monetary policy, TDS analysts wrote in a report released on June 20th: “The front-end is now pricing in around 15bp in cuts for August meeting and around 50bp in total for 2024. We believe risks could be 'finely' balanced as there is still a lot of information markets need to absorb ahead of the next meeting, including CPI data on July 17.”

Trade Major Currency Pairs With Admirals

Whether the largest central banks adjust their interest rates or not, there is a variety of financial data releases that could influence exchange rates of major currency pairs such as the EUR/USD, GBP/USD, EUR/GBP, USD/JPY.

Beginner traders should study how economic data releases could influence the global forex market and improve their financial knowledge as a whole. One of the ways to do it is to use educational materials such as e-books, articles, how-to guides, webinar videos etc., that are sometimes provided by forex brokers for free. This way you can upgrade some of your skills as lack of trading experience could play a negative role in the performance of your overall trading strategy.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.