Schroders: Will June be the month when all three of the BoE, ECB and Fed first cut interest rates?

March 22, 2024

A more cautious Bank of England looking for further evidence of a sustainable fall in inflation makes it less likely to be an early mover on cuts, according to Azad Zangana, Senior European Economist & Strategist at Schroders.

The Bank of England (BoE), US Federal Reserve (Fed) and European Central Bank (ECB) have all kept rates on hold this month. And, following the outcomes of their rate-setting meetings, market expectations are now building for all three to cut in June.

For its part, the BoE’s Monetary Policy Committee (MPC) decided today to keep the UK’s main policy interest rate on hold at 5.25% for the eighth consecutive month.

As in the eurozone and US, inflation in the UK has been moderating, but the committee continues to look for evidence it is falling back to its target on a sustainable basis.

Annual inflation in the UK, as measured by the Consumer Prices Index, has fallen from a peak of 11.1% in October 2022 to 3.4% last month (February). This represents the lowest rate of price increases since September 2021.

Pressure mounting on BoE to cut interest rates

With the UK economy in recession, pressure is mounting on the BoE to begin to ease policy. The MPC’s language has shifted from a signal that interest rates would remain higher for longer, and essentially on hold for a prolonged period, to a signal that interest rates can fall, but remain restrictive.

However, while the MPC acknowledges the near-term easing of inflation pressures in the latest MPC meeting minutes, it also stated that indicators of the persistence of inflation remain elevated.

Overall, the decision to keep rates on hold is not a surprise, and while the MPC minutes suggest rate cuts are closer, there is little to suggest that easing is imminent. There was also a slight shift in the votes amongst MPC members, as the one member that had been voting for a hike, has now joined the flock in voting for no-change.

Meanwhile, only one member of the nine-person committee voted for a cut (again).

Market expectations for the first interest rate cut have shifted in recent weeks from August to June, as inflation has undershot the BoE’s forecast.

The Schroders forecast had the BoE cutting its interest rate from May, but it seems that the BoE is waiting for further confirmation that inflation pressures, particularly the contribution from the service sector, have eased further.

Caution on the MPC’s part may mean that the cut comes through just a month later in June, as currently expected by most market participants. As a result, we’ve also adjusted our own forecast for the first cut to be in June too.

Markets now expect all three central banks to cut in June

Financial markets also appear to be coalescing around the month of June for the ECB and Fed to start cutting rates.

The Schroders forecast had the ECB cutting rates this month (March), which was proven to be too soon following the outcome of ECB Governing Council rate-setting committee earlier this month.

Despite the ECB staff projections showing inflation returning to target at the two-year time horizon, the council decided to wait until more data was available that confirmed the improvement in inflation was likely to last.

In the Q&A session during the ECB press conference, president Lagarde suggested that a lot more data would be available by the meeting in June, but not enough for April – providing the strongest hint yet that June is seen as milestone month.

As a result, we have updated our rates forecasts have both the BoE and ECB cutting their respective interest rates in June, in-line with our call for the Fed, with the latter call further supported by the outcome of the bank’s Federal Open Market Committee meeting, yesterday.

We still expect the ECB is to cut four times this year for a total of 100 basis points (bps), while our forecasts have the BoE and Fed cutting by 75 bps each.