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Macro Monthly: Interest rate cuts delayed

21 March 2024

Key takeaways

  • With inflation no longer surprising on the downside…
  • …and labour market resilience likely to support consumer demand…
  • …markets now expect rates to be cut later (and by less) in 2024.

Markets remain focused on the timing of central bank rate cuts, as central banks focus on the latest inflation data to see when they believe they can start to trim rates. 

Proceeding with caution
Resilient data is delaying rate cuts

For many central bankers, the data since the start of 2024 have left them in a bind. Inflation in January, notably in the US, was slightly higher than expectations, and with growth holding up and some positive signals emerging in real wage growth and activity surveys like the PMIs, policymakers could be forgiven for proceeding with caution.

Inflation is moderating but services inflation is stickier

The risks to both growth and inflation are balanced – with concerns about higher rates leading to more stress for some firms and households being offset by recoveries in global manufacturing and still-robust consumer demand in much of the world. Food and energy prices still pose downside risks to inflation in the near term, but services inflation may remain sticky amid strong demand from consumers (see Charts 1 and 2). 

Source: Refinitiv Datastream
Source: Refinitiv Datastream

The challenges are greater still in some emerging markets which are seeing domestic macroeconomic conditions that warrant rate cuts, but they are likely to await signals from the Federal Reserve before acting to mitigate capital outflows and safeguard currencies. 

Interest rate outlook

We look at some of the key data on an economy-by-economy basis that will determine the likely timing and pace of any rate cuts from central banks. 

We expect the Federal Reserve to cut in June…

In the US, Q4 GDP exceeded expectations and Q1 looks set to be a similarly strong story based on the latest Atlanta Federal Reserve GDPNow print. With January’s core Personal Consumption Expenditures inflation data picking up, the path to achieving the 2% target may not be so easy, particularly with the labour market data remaining strong. We still expect the first Federal Reserve rate cut in June. 

Source: Macrobond
Source: Macrobond
…along with the European Central Bank

In Europe, activity has been weaker. The UK ended 2023 on a technical recession and eurozone growth was non-existent through the year. But there are signs it is past the trough in activity: PMIs have picked up, labour markets remain firm, and positive real wage growth is poised to support consumption going forwards. Inflation continues to edge lower but we expect services inflation to stay sticky amid high wage growth and stronger demand. We look for the European Central Bank to start its cutting cycle in June and the Bank of England in August.

Asia’s central banks await a shift by the Federal Reserve

In Asia, most central banks are seeing improving growth and lower inflation but await a shift by the Federal Reserve while in mainland China ongoing stimulus measures for the property market may also see a recovery in 2024 led by a recovery in consumer spending. 

Tough choices

Globally central banks face tough choices on when to start easing – and with growth holding up and inflationary pressures lingering, the likely timing is moving later.

Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➔ Actual is in line with consensus
Source: Refinitiv Eikon, HSBC

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1. This report is dated as at 11 March 2024.

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