When will interest rates fall and will the Fed, ECB or BoE be the first to take the plunge?

Markets are primed for clues on the timing of global interest rate cuts this week, with crucial data set for publication out of the US, Europe and UK.

US inflation data on Wednesday will be key in determining the path for Federal Reserve monetary policy, while markets will also be keeping a close eye on European Central Bank policy meeting commentary on Thursday and UK GDP data due on Friday.

This is Money looks at how this week could shape the course of global interest rate cuts – and which central bank will be first to take the plunge.

Federal Reserve Bank Chair Jerome Powell has pushed back against overly optimistic rate cut expectations 

US rate cut expectations keep getting pushed back 

Investors have been forced to reassess the outlook for US interest rates multiple times already over the last year, with markets now pricing less than three cuts by year-end compared to as many as seven predicted at the start of 2024.

The US economy has held up far better than pessimistic forecasters had predicted, thanks to a surprisingly buoyant consumer, and stronger than expected US jobs data last week again pushed back the anticipated timing of the first cut.

Richard Hunter, head of markets at Interactive Investor, said: ‘Expectations for the first anticipated rate cut are now moving away from June and towards July, with an outlier consensus that on current form there may be no need for cuts at all this year.

‘However, markets moved higher on other readings within the [jobs] report, most notably wage growth, which rose by 0.3 per cent for the month but fell slightly on an annualised basis to 4.1 per cent.

‘This led to the conclusion that wage inflation could be normalising, which has been a point of contention for the Fed.’

Wednesday’s reading is expected to show core inflation has slowed from 3.8 to 3.7 per cent, and any surprise to the upside would likely push forecasts for rate cuts further down the line.

While the CPI reading will be crucial, further clues will be revealed later this month as the US first-quarter earnings season kicks off. 

Markets will be keeping a close eye on corporates’ guidance on costs and consumer demand.

Governor of the Bank of England has been particularly vocal on the impact of wage inflation 

UK facing higher-than-expected interest rates for longer?

After entering a shallow recession in the second half of last year the UK economy has shown more positive signs of life of late, and January’s rebound in GDP growth is expected to be followed by a 0.1 per cent gain for February – suggesting a positive first quarter overall.

Morgane Delledonne, head of investment strategy in Europe at Global X ETFs, said a better-than-expected GDP print for the month would likely see the BoE readjust its forecast for the rest of the year.

She added: ‘And if it is the case that GDP is stronger than expected, it might slow the easing cycle and leave the UK with an end rate higher than previously thought.’

Markets are currently price 75bps of BoE easing this year, which would take base rate from its current level of 5.25 per cent to 4.5 per cent. 

Markets are currently split on the timing of the first cut and it looks like a toss up between June and August.

Key to the BoE’s decision, though, will be services inflation and wage growth, with data on both due later this month.

European Central Bank President Christine Lagarde has raised market expectations of a June cut 

Europe first to take the plunge?

The Eurozone also paints a rosier economic picture despite a downturn in the powerhouse German economy, led by its dominant industrial sector.

Meanwhile the ECB recently revised down inflation forecasts after the headline figure fell to 2.4 per cent in March from 2.6 per cent in February.

The bank now expects inflation of 2.3 per cent overall for 2024, down from 2.6 per cent, and 2 per cent in 2025.

This has pushed back expectations for the ECB’s first interest rate cut, but markets are still pricing 90 basis points of cuts overall for 2024.

Delledonne said: Markets are pricing in an almost 80 per cent chance of a first rate cut in June.

‘Christine Lagarde said at the previous meeting that the ECB was waiting to have more information by June.

‘In an ideal scenario, the ECB would have waited for the Fed to act first, especially given the possible consequences for the euro.

‘But [it could] act first to boost the economic activity of the region.’

‘I will be watching for on Thursday would be how the rise of energy prices will affect the ECB forecast for inflation, and how they might be more dovish, or hawkish as a reaction to that.’

However, global chief investment officer for fixed income at Allianz Global Investors Franck Dixmier cautioned: ‘The timing and scale of future rate cuts remain open.

‘We expect a measured speech, confirming the very high probability of a first cut in June and presenting it as a first step towards the normalisation of policy.

‘But the ECB will likely insist that future rate cuts are not a given and will depend on the foreseeable trajectory of inflation.’

This post first appeared on Dailymail.co.uk