June 23, 2024

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Investors bet on earlier interest rate cuts in eurozone and UK

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Investors have brought forward the date at which they expect the European Central Bank and Bank of England to begin cutting interest rates after a flurry of data suggesting the eurozone and the UK are headed for a period of near-stagnation.

Along with the US Federal Reserve, both central banks opted to leave rates unchanged at their latest policy meetings, emboldened by slowing inflation and wary that previous rounds of monetary tightening take time to weigh on consumer demand and economic growth.

But policymakers were also careful to warn that the battle to tame inflation is far from over, with ECB president Christine Lagarde warning it was “totally premature” to consider rate cuts. The comments were later echoed by Bank of England governor Andrew Bailey, who added that “upside risks” to inflation remained.

However, weaker than expected UK retail sales data on Friday and poor industrial production figures from the eurozone on Thursday have added to market conviction that the three big central banks will each deliver at least three rate cuts next year.

Markets have now almost entirely dismissed the prospect of further monetary tightening, while pricing in the first rate cuts in the eurozone, the UK and the US for June. 

That marks a stark change since the beginning of October, when investors did not expect the BoE and the ECB to implement their first cuts until early 2025 and September 2024, respectively.

The timing and depth of the recessions many investors expect to befall Europe and the UK in 2024 will dictate when the first rate cuts arrive, according to Chris Teschmacher, a fund manager at Legal & General Investment Management.

“Many anticipate a soft landing that will allow a gentle release from high interest rates [but] we believe central banks will be cutting more sharply in response to a worsening economic downturn,” Teschmacher…

2023-11-18 08:00:14

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