Leading central banks have delivered a stark warning to markets, indicating that inflation’s persistence will lead to a more gradual approach to interest rate cuts in 2025. This cautious stance has triggered significant movements in bond markets across both sides of the Atlantic.
The yield on US 10-year Treasuries, widely regarded as a cornerstone of global finance, surged to 4.59 per cent, marking its highest point since May. This dramatic shift occurred as Federal Reserve officials scaled back their rate-cutting projections, prompting investors to hastily reassess their policy expectations for the coming year.
The Bank of England maintained its vigilant position, keeping benchmark rates steady while expressing heightened concerns about “inflation persistence.” British yields mirrored the US trend, reaching 4.66 per cent – the highest level witnessed in over a year.
Market participants have substantially adjusted their expectations, now pricing in just two quarter-point rate cuts for the Bank of England next year, down from four previously anticipated in October. Similarly, Federal Reserve projections now indicate only 0.5 percentage points in cuts for 2024, half the reduction forecasted three months ago.
The European Central Bank stands in contrast to its counterparts, maintaining a more optimistic outlook by declaring the “darkest days” of inflation behind us. However, this position appears increasingly isolated as both US and UK inflation readings continue to exceed expectations.
The cautious approach from central banks reflects broader economic concerns, including potential inflationary policies from the incoming US administration, ongoing trade uncertainties, and the challenging “last mile” in controlling price growth. These factors collectively suggest a more complex and prolonged journey toward monetary policy normalisation than previously anticipated.
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