European Central Bank, Federal Reserve and Bank of England will start cutting interest rates next year, Nomura predicts – Monetary Policy

Nomura expects the European Central Bank (ECB), Bank of England (BoE), and the US Federal Reserve (Fed) to begin cutting key interest rates next year as inflation abates and the recession continues. The Japanese investment bank, citing Reuters, also argues that key interest rates in the US, UK and the eurozone should peak this year.

In the case of the United States, economists at the Bank of Japan estimate that the federal funds rate will reach the range between 3.50% and 3.75% by February next year, although a recession is expected from the fourth quarter.

Once the US inflation rate drops to the 2% to 2.5% range, Nomura believes that the central bank led by Jerome Powell will cut key interest rates at several meetings beginning in September 2023. He further estimates that the balance sheet reduction will end at that time.

At its last monetary policy meeting, the Federal Reserve raised interest rates by 75 basis points, thus moving them to a range of between 1.5% and 1.75%. The US central bank started its key interest rate hike cycle last March, with an increase of 25 basis points. At the next meeting, in May, it achieved an even larger increase: 50 basis points. According to the latest data, the annual US inflation rate in June touched 8.6%. This number will be updated this week for June.

Regarding the eurozone, Nomura expects the European Central Bank to raise key interest rates by 175 basis points by March 2023. However, as the potential recession continues, the Bank of Japan’s economists are signaling to the monetary authority to start cutting rates by 25 basis points. Point at the meeting in June next year.

At the last meeting, the European Central Bank announced that it intends to raise key interest rates by 25 basis points at next week’s meeting, opening the door for a larger increase in September, if inflation warrants it. In addition, the central bank confirmed the end of net debt purchases on July 1.

After the last meeting, the European Central Bank revised its estimates of eurozone inflation upwards this year, and now expects a value of 6.8%. Growth in the single currency bloc is expected to be 2.8%, which is much lower than previously estimated values ​​(3.7%).

Regarding inflation, the monetary authority expects it to slow next year to 3.5% and 2.1% in 2024, still above the 2% target. These values ​​are higher than expectations issued in March, when the European Central Bank indicated an inflation rate of 5.1% this year, 2.1% in 2023 and 1.9% in 2024, and in May, inflation in the euro was 8.1%, according to Eurostat data. .

Finally, regarding the UK, the Japanese institution estimates that the Bank of England will raise interest rates by 100 basis points until the end of the year, anticipating a reduction in the period from May to June next year. So far, the Bank of England has raised key interest rates five times this year, to currently 1.25%.

In addition to raising benchmark interest rates to their highest levels in 13 years, the Bank of England also revised its forecast for peak inflation, which it expects to reach 11% and be reached in October. As for the development of the economy, it has already experienced a contraction this quarter.

At the recent European Central Bank forum in Sintra, the three central banks unanimously agreed: it is necessary to put all weapons on the table in the fight against inflation. The Bank for International Settlements warned of the need to “carefully calibrate instruments to combat inflation”.