While inflation trends cooled in the second half of last year, price pressures have returned in most advanced economies in 2024, including in Australia and the US, leading investors to re-think how soon central bankers will cut rates.
Despite the cautionary tone emanating from recent central bank statements, including Governor Michele Bullock of the RBA earlier this week, the central base case interest rate forecast for many economies still looks optimistic, thanks to subdued energy price shocks and abating supply chain disruptions. Of course, short-term risks remain, including persistently high services inflation, high rentals and strong wage growth, and the central banks will remain “data dependent”.
This graphic shows the interest rate forecast for advanced economies, based on the International Monetary Fund’s (IMF) 2024 World Economic Outlook.
In broad terms, we continue to expect that rates will be cut but only very gradually. Further out, and as projected by the IMF, interest rates could fall more substantially in two years. Like the US, the European Central Bank (ECB) is forecast to cut rates in the second or third quarter of 2024, with rates set to fall to 2.6% by 2026, but this could prove optimistic. While inflation has cooled at a faster rate across Europe compared to the US, GDP growth is also projected to be more muted. This year, the IMF projects that GDP across the euro area will increase just 0.8% versus 2.7% for the US economy.
In the UK, monetary easing is projected to move more gradually, with the first cut projected for the third quarter of this year. Growth across the UK economy is projected to be tepid for 2024, weighed down by the impact of higher rates, lower productivity, and sluggish investment growth.
In Australia, with inflation reducing more slowly than in some other advanced economies, Michele Bullock says it’s too early to declare victory over inflation as she avoids the markets’ guessing game on interest rates. The RBA’s statement acknowledged that the recent rise in petrol prices and the higher-than-expected services inflation mean that inflation is forecast to be higher “in the near term”.
That translates into the market getting the message that rates could stay where they are for the rest of this year. The RBA will remain “vigilant” about the risks, repeating its mantra that it is not ruling anything in or out.
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