Western world’s biggest central banks will likely keep interest rates at the same level this week, amid concerns about stubbornly high inflation. This is despite expectations of sharp reductions in borrowing costs for next year.
In a crucial week for the world economy, it is expected that the US Federal Reserve and Bank of England will keep their interest rates at the current high level to maintain the inflation rate from its highest levels since decades.
The financial markets expect interest rates to drop next year due to a cooling of inflation, and high borrowing costs that weigh on the economy. This could lead to recessions both on the east and west coasts of the Atlantic, before important elections.
“Their message will likely be similar.” “Good progress has been achieved in reducing inflation but they cannot afford complacency,” said Raphael Olszyna Marzys, an economist with J Safra Sarasin Sustainable Asset Management.
According to Nomura Investment Bank, the financial markets reflect the likelihood of Fed and ECB rate cuts of up to 1.4 percent by 2024. Meanwhile, expectations are increasing for the BoE’s rates to be cut by almost one percentage point.
Threadneedle street policymakers have said that UK interest rates will need to remain at their current level of 5.25 % for a prolonged period of time in response to the persistently high inflation rate in the UK. They also ruled out the possibility of a rate cut anticipated by the financial markets.
Andrew Bailey, Bank of England governor, stated last month that it was “far to early to think about rate cuts”. He also warned there was “no place for complacency” in regards to inflation, despite the fall in consumer prices from 6.7% in September to 4,6% in October .
Jerome Powell warned that it was “premature” to conclude earlier this month that the US Fed had taken a restrictive enough stance to curb inflation. He said, “We’re prepared to tighten the policy further if necessary.”
US Labour Market figures released on Friday show that the world’s biggest economy has added 199,000 new jobs in November. This is up from the 150,000 created the month before. The central bank chiefs are closely monitoring data on the jobs market for signs that wage increases are slowing to levels compatible with their 2% target.
On Tuesday, figures from the UK job market are expected to reveal that the annual growth of average weekly earnings has slowed to 7.7% from 7.9% for the three-month period ending in September.
Jagjit Chadha is the director of National Institute of Economic and Social Research. He said that central banks are using a wait-and-see approach to prevent inflationary pressures from becoming entrenched.
“We have done all the heavy lifting.” “Now it’s just a matter of observing how the economy reacts as inflation levels out,” said he.
Surveys indicate that economic growth in advanced nations is slowing down as businesses and households feel the squeeze of rising living costs, and interest rates.
The official figures, due to be released on Wednesday, are expected to show that Britain’s economy went into reverse last month. A fall of 0.1% in the gross domestic product is predicted, compared with 0.2% growth in September.
falling to 2.4% in December. Germany’s economy heading into a recession as a result of a regional slowdown.
Ruben Segura Cayuela is an Europe economics at Bank of America.
But from there to cuts, the path is still long.” “But the road to cutting is long.”