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Top European central bankers have said interest rates will remain high, despite market bets that weaker growth will force rate-setters to cut borrowing costs.
Andrew Bailey, Bank of England governor, said on Wednesday that it was premature to discuss rate cuts — even though Huw Pill, the BoE’s chief economist, said this week that markets were reasonable to expect a reduction in mid-2024.
“It’s really too early to be talking about cutting rates,” Bailey said at a conference in Dublin. “The market will of course reach a view — it has to reach a view on the future path of interest rates. I totally understand that. But we are very clear we are not talking about that.”
The European Central Bank’s chief economist Philip Lane, Bundesbank head Joachim Nagel and Ireland’s central bank chief Gabriel Makhlouf all issued similar warnings that rates may need to stay high.
Officials said they would still want to see companies cutting profit margins — and governments their budget deficits — to be convinced inflation would fall sufficiently from one of the worst surges in decades.
“The ‘last mile’ before we reach our inflation target may well be the hardest,” said Nagel, one of the more hawkish members of the ECB governing council. “In the current environment of high inflation, fiscal policy needs to be restrictive.”
The ECB, US Federal Reserve and BoE have all kept policy on hold in recent weeks, adding that they could still tighten further if inflationary pressures failed to recede.
But after falls in headline rates of inflation and weaker growth in Europe, markets are pricing in several rate cuts in big economies next year.
Those bets undermine central banks’ attempts to curb prices, since expectations of future rate cuts bring down the current cost of borrowing.
“Bond markets are prone to price in rate cuts as soon as you get to peak rates and there’s starting to be a degree of confidence in markets that we are there,” said Michael Matthews, co-head of fixed interest at Invesco. “But what central banks don’t want is markets taking away their tightening.”
Investors are pricing in close to three cuts in 2024 by the BoE, a sharp increase from the quarter-point shift priced in September, despite its repeated claims that policy would stay tight for an extended period.
However, BoE officials have given mixed signals.
“Pill’s comments lit a blue flame under short-end gilts, but Bailey pushed back pretty firmly on that today,” said Quentin Fitzsimmons, a senior portfolio manager at T Rowe Price, an investment manager. “If bond markets get a whiff of easier policy, they will rally.”
In the eurozone, markets are now pricing a 75 per cent probability of a rate cut by the ECB by April, up from a 30 per cent chance in early October.
Lane said on Tuesday that while there was “some progress” in the reduction of eurozone inflation from a peak of 10.6 per cent a year ago to 2.9 per cent in October, it was “not yet enough”.
“That is why we are in this period of holding interest rates at a significantly high level until this process makes further progress,” he said.
In the US, last week’s market rally eased financial conditions for businesses and households by the same amount as a jumbo 0.5 percentage point interest rate cut, according to Goldman Sachs analysts.
Fed chair Jay Powell is speaking on Thursday.
Traders broadly expect the Fed to hold off on rate cuts until well into 2024 — reflecting in part a belief in Powell’s insistence earlier this month that the Federal Open Market Committee is not thinking about the timing of loosening “at all”.
Fed hawks, such as governor Michelle Bowman, have even suggested that borrowing costs could rise further should progress on getting inflation down stall or if it appears the current level of rates is insufficient to bring inflation to 2 per cent in a timely way.
Lorie Logan, president of the Dallas Fed and a voting member on the FOMC this year, said the Fed would “continue to need to see tight financial conditions” to feel confident inflation would return to the Fed’s goal swiftly and sustainably.
As it stood, inflation appeared to be “trending toward” 3 per cent, rather than the Fed’s target, she warned.
Another voting member, Neel Kashkari of the Minneapolis Fed, also raised this concern this week, saying he was “not ready to say we are in a good place”.
Additional reporting by George Steer in London
Source: Economy - ft.com
