Alexander Izgorodin. Synchronized interest rate cuts in Europe and signs of worry in the US

The first in 2024 quarter was the last quarter of record base rates in the euro area. Market forecasts indicate that the European Central Bank (ECB) is getting closer to cutting interest rates, with the first rate cut likely as early as June. The market expects that the US Federal Reserve Bank (FED) will start cutting interest rates from June, but the dynamics of the base interest rates in the US may become a black swan and strongly reduce the current optimism of the markets. It is likely that the Fed will not cut interest rates at all this year, and if they do, it will be only once, followed by a long pause.

The first cycle of interest rate cuts was launched by the Swiss National Bank (SNB) on March 21. after reducing base interest rates by 0.25 percent. point to 1.5 percent. Next in line is the ECB: according to current market forecasts, it should cut interest rates on June 6.

Doubts about interest rate cuts in the euro area are indeed becoming less and less. In the euro zone, both inflation and its most important components – services and net inflation – continue to slow down, the economic cycle remains weak, the economy is balancing on recession and stagnation. Also, early indicators point to a slowdown in wage growth accelerating here, which is a major focus for the ECB right now. Inflation in services in the euro area was still at 3.9 percent in February, and only slower wage growth can slow it down. March 7 The ECB cut its forecasts for euro zone gross domestic product (GDP) and inflation, with ECB chief Christine Lagarde citing signs that wage growth and corporate profit margins are slowing in the euro zone.

The ECB’s next monetary policy meeting will take place on April 11, but the probability of the ECB cutting rates in April is only 7% in the market’s eyes, mainly due to technical aspects. At the moment, the ECB is more concerned about wage indicators than inflation, but a large part of the official wage data in the eurozone countries will not be published until May. Yet another ECB monetary policy meeting will take place on June 6, and the market sees 80%. the probability that this is when the ECB will start cutting base rates for the first time.

My own view is that the ECB will cut interest rates every other meeting from June 6, thus reducing interest rates very gradually in order not to cause another inflationary shock. In this case, by the end of this year, interest rates in the euro zone will be reduced 3 times by 0.25 percent each. point and at the end of the year from the current 4 percent. will decrease to 3.25 percent. The latest market forecasts are somewhat more optimistic: the market believes that the ECB will cut interest rates 4 times by the end of the year, and the base interest rate in 2024. will reach 3 percent at the end

June 12 the Fed will also have a monetary policy meeting. However, the monetary policy of this central bank may surprise many this year and may not meet the optimistic market forecasts. Currently, the market is still predicting that the Fed will cut interest rates in June – the probability is 67%. The Fed is expected to cut interest rates 3 times by the end of the year: June 12, September 18. and December 18 But another scenario is also very real: the Fed will cut interest rates in June, and this will be the first and only base rate cut in the US in 2024, and other rate cuts will not be allowed by the overly strong US economy, labor market and the threat of a second inflation.

Unlike the Eurozone, where the economy is teetering on recession and stagnation, the US economic situation is quite different. US GDP in the fourth quarter of 2024 grew by more than 3 percent in the quarter, the unemployment rate in the US reaches 3.9 percent, and wage growth exceeds 4 percent. There is a very real risk that a rate cut by the Fed, amid a very strong US economy and labor market, will trigger another wave of inflation through faster US economic growth, faster wage and commodity price growth. As a result, there is growing speculation that instead of the 3 predicted cuts, there may be none.

Although the major central banks will likely start cutting interest rates only from June, the market is already preparing for the acceleration of the world economy, the recovery of cyclical sectors (industry, consumption, raw materials, construction), and the growth of demand for raw materials. For example, from 2024 at the beginning of the year, the price of oil increased by 13 percent, the price of copper and nickel increased by 4 percent each. If the increase in oil prices was also influenced by the ongoing geopolitical unrest, the dynamics of copper and nickel prices is telling: the market is clearly preparing for a rebound in demand for raw materials due to the stimulation of the Chinese economy and the recovery of the demand for raw materials in the West due to falling interest rates.

The already felt recovery of the commodity market may contribute to a second wave of inflation in the US and prevent the Fed from aggressively cutting interest rates. This is a red signal for Lithuanian companies due to the impact on the euro exchange rate against the US dollar.