Waiting for the interest rate cuts

Central bankers in the US, UK, and Eurozone have repeatedly pushed back interest rate cuts, diffusing market expectations of early rate cuts. Steven Bell, Chief Economist, EMEA at Columbia Threadneedle Investments, talks about the long-term implications of these decisions.

In the last week of January, Fed Chairman Jay Powell revealed that an interest rate cut in March was possible but ‘not the base case.’ Bell stated that robust US labour market data followed the announcement, resulting in a sharp rise in interest rate expectations.

The chief economist also explained how the slowing wage inflation should help the Fed get closer to their 2% target, allowing them chances of heavy interest rate cuts over the next year.

While talking about the political scenario, Bell said, “Donald Trump has been fiercely critical of the chair, Jay Powell, and accused him a few days ago of planning to cut interest rates to help Biden get re-elected.”

In Europe and the UK, the political pressure is less, but the economic uncertainty is more intense, Columbia Threadneedle’s chief economist says. He cited ECB President, Christine Lagarde’s quote stating that it is ‘premature’ to discuss interest rate cuts.

“They need to see a big slowdown in the wage round currently underway and continued progress on inflation if they are to cut in April. That’s a possibility but, with no meeting in May, the next bet in June,” argues Bell.

Similarly, regarding the UK, Bell feels, “The Bank of England is firmly in the ‘wait and see’ camp. They too need to see a big fall in UK wage inflation, and I think they will be one the last central banks to cut rates.”

About the long-term impact, he states, “It seems to me that we are still in for big cuts in interest rates in the developed world but that the outlook is clouded by economic uncertainty.”

As he concludes, Bell says, “All in all, falling inflation and falling interest rates are good news for financial markets overall. The problem is that there is a great deal of optimism already priced in, and central bankers are cautious beasts.”

View the complete insight here.