Major Central Banks Hold Interest Rates; Cuts in Borrowing Costs Seen in 2024
Economists suggest that central banks are adopting a cautious approach, closely monitoring inflationary pressures to prevent them from becoming entrenched. Despite growing expectations for significant cuts in borrowing costs in 2024, the world’s three largest central banks – the US Federal Reserve, Bank of England, and European Central Bank – opted to maintain their interest rates last week due to concerns over persistently high inflation.
Market projections indicate an anticipated reduction in interest rates next year, with financial markets predicting a decline driven by what they consider a cooling inflation scenario. However, the possibility of high borrowing costs weighing on economic growth raises concerns of potential recessions on both sides of the Atlantic, especially in the lead-up to major elections.
The US Federal Reserve is poised to embark on a journey of interest rate cuts in the coming year following its decision on December 13 to keep interest rates steady. In new economic projections, the Fed made clear that the historic tightening of US monetary policy executed over the past two years has come to an end, signaling the arrival of lower borrowing costs in 2024.
After implementing swift increases that resulted in a 5.25 percentage-point rise since March 2022 – sending borrowing costs to their highest level in 22 years earlier this summer – the Federal Reserve has now maintained the policy rate since July. This decision aligns with inflation nearing its target.
The current interest rate range is set between 5.25% and 5.5%, which has remained unchanged since July. Having abstained from altering policy for three consecutive meetings after a rapid succession of increases, officials are being closely observed for any indications of when and to what extent interest rates might decrease, as reported by The New York Times. According to projections by Fed policymakers on December 13, they anticipate lowering borrowing costs to 4.6% by the end of 2024, in contrast to their previous estimation of 5.1%.
The forecast suggests that central bank officials are considering three rate cuts for next year, according to The New York Times. Furthermore, not a single Fed official expects interest rates to be higher by the end of the following year.
While it may be too early to speculate on when the Bank of England will reduce interest rates, Bank Governor Andrew Bailey emphasized that the same could not be definitively said for the UK. This statement followed the Bank’s decision to maintain interest rates at 5.25%, a 15-year high.
The Bank of England has raised interest rates 14 times since December 2021 in an effort to curb surging inflation. However, the global economy encountered uncertainty throughout 2023, impacted by rising interest rates, inflation, tight labor markets, and geopolitical shocks, all of which disrupted forecasts and predictions.
Economists assert that central banks are employing a wait and see approach to mitigate the risk of entrenched inflationary pressures. By taking this measured stance, central banks aim to strike a delicate balance in addressing the economic challenges currently faced.
As the world anxiously awaits central banks’ next moves, the potential for reduced borrowing costs introduces possibilities for economic recovery and stability. However, the impact of interest rate cuts and their effectiveness in curbing inflationary pressures remain topics of debate among experts in the field.
In summary, major central banks have chosen to maintain their interest rates for the time being, opting for a cautious approach in light of persistent inflationary concerns. Market expectations, however, anticipate cuts in borrowing costs in 2024 due to predictions of cooling inflation. These decisions have significant implications for economic growth and the associated risks of potential recessions, particularly as elections approach on both sides of the Atlantic.
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