Is 2024 the year when the biggest central banks will start with rate cuts?
CENTRAL BANKS MEETINGS
Over the past few years, increasing geopolitical tensions have created significant pressure on the global economy limiting its growth potential. In order to speed up economic recovery major central banks started to consider or initiate various measures. While the Federal Reserve is considering the best timing to start with interest rate cuts, China's central bank has injected a substantial sum into its financial system to strengthen economic rebound. ECB and BoE have adopted a more cautious stance in their approach.
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FEDERAL RESERVE: MARCH’S MEETING
The Federal Reserve's last interest rate increase was in July 2023 and since then rates were kept at 5.5%. Next meeting on March 20 will probably bring no change as inflation, although has decreased from its previous highs, still remained above the 2% target. According to recent Fed official statements, a possible rate cut could be expected by June or July 2024. Both Fed projections and market forecasts indicate lower rates by the end of 2024 with around three to four rate cuts.
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ECB AND BOE MONETARY POLICIES
Following unexpectedly persistent inflation in February European Central Bank chose to keep interest rates steady at 4.5%, defying widespread expectations of a rate cut. Furthermore, the ECB signaled its reluctance to ease monetary policy promptly, despite the Eurozone economy's continued stagnation. Similarly, the Bank of England could also be expected to keep interest rates elevated at current 5.25% for a longer duration. However, Goldman Sachs predicts five consecutive 25 basis point interest rate cuts by the year's end, starting with the first cut in June rather than May. The next ECB meeting is scheduled for April 11, while the Bank of England's meeting is set for March 21.
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HIGH INTEREST RATES: THE IMPACT ON THE STOCK MARKET
The US stock market was under strong pressure in 2022 due to a number of interest rate hikes the Federal Reserve conducted. S&P 500 lost more than 18% in this period. In 2023 the sentiment changed, the rate hike period was concluded and S&P 500 recovered by over 26%. Currently, with lower rates in sight, prospects of lower borrowing costs could have a positive impact on corporate earnings, positive market sentiment and stock prices both in the US and Europe.
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HIGH INTEREST RATES: THE IMPACT ON THE COMMODITY MARKETS
While higher interest rates were supposed to negatively affect commodity prices, due to the stronger US dollar recent geopolitical tensions have offset this impact, especially concerning crude oil and gold. Now, with US interest rate cuts on the horizon, commodity prices may experience an additional boost.
Conclusion –
Due to the growing global economic pressures, major central banks have started taking actions to boost recovery. The Federal Reserve is thinking about cutting interest rates, while China is injecting significant funds into its financial system and the ECB and BoE proceed cautiously on possible rate cuts. The Fed has kept rates since July 2023, but there's expectation of a cut by mid-2024. Market forecasts indicate lower rates by late 2024, with possible three to four cuts by the end of the year. Despite stubborn inflation, the ECB held rates steady, while the BoE is likely to do the same. Geopolitical tensions have offset the expected negative impact on commodity prices, especially oil and gold. Potential US rate cuts may further boost commodity prices as well as the US stock market.