(MENAFN) Investors are eyeing a potential shift in monetary policy as they anticipate the European Central Bank (ECB) and the Bank of England to initiate interest rate cuts, mirroring the recent stance of the US Federal Reserve. The expectation is fueled by a series of data pointing to an impending economic slowdown or near-recession in both the euro zone and the United Kingdom.
Recent policy meetings of both central banks chose to maintain unchanged interest rates, citing a slowdown in inflation and concerns about the delayed impact of previous financial tightening on consumer demand and economic growth. Despite this, policymakers emphasized that the battle against inflation is ongoing. ECB President Christine Lagarde cautioned that it is premature to consider lowering interest rates, a sentiment echoed by Bank of England Governor Andrew Bailey, who emphasized the persistent risks of further inflation.
Amid weaker-than-expected British retail sales and sluggish industrial production in the euro zone, market sentiment is leaning towards the anticipation of at least three interest rate cuts from each of the three major central banks next year.
Markets have shifted away from expecting further fiscal tightening, now pricing in the possibility of the first interest rate cuts as early as June in the Eurozone, the UK, and the US. This marks a notable departure from early October when investors were projecting the Bank of England and the European Central Bank to implement their initial cuts in early 2025 and September 2024, respectively.
Chris Teichmacher, fund manager at Legal & General Investment Management, highlights that the timing and severity of the anticipated recession in Europe and the UK in 2024 will influence when the initial interest rate cuts occur. Teichmacher suggests that central banks may opt for more pronounced cuts in response to an escalating economic downturn.
Recent data, including the European Commission's latest forecasts, paint a grim picture of the overall economic landscape. The Eurozone's projected growth for 2023 has been revised down to 0.6 percent, a 0.2 percentage point reduction from the September forecast.
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