From Washington to Frankfurt to London and beyond, central bankers are approaching their final decisions of the year against a backdrop of unease at how the global inflation cycle is turning.
Policymakers from fully half of the Group of 10 jurisdictions of most-traded currencies are scheduled to meet in the coming days, and interest rates for 60% of the world economy will be set in a whirlwind 60-hour window.
Most notable will be the US Federal Reserve on Wednesday, followed on Thursday by central banks including those of the eurozone and the UK.
With the exception of Norway, which may conceivably raise borrowing costs, most monetary officials are confronting financial-market pressure to explain why they seem unhurried about pivoting to monetary easing.
Synchronized weakening in inflation data and some evidence of softening economies have prompted investors to ramp up bets on rate cuts in the first half of 2024. That’s a view that could clash with the mantra the Fed and its peers expounded little more than three months ago, of “higher for longer.”
In Latin America, which led the push upwards with rate hikes, most central banks are already on the way down, and Brazil and Peru may both cut in the coming week.
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Their peers in the US and Europe aren’t so sure. After starting the year with renewed vigour to aggressively ramp up borrowing costs, they’re ending 2023 with more hesitation — setting the scene for what could become a prolonged standoff with investors.
“Central bankers are saying, ‘look, we’re waiting to see if what we’re seeing on this disinflation is sustainable,’” Joyce Chang, chair of global research at JPMorgan, told Bloomberg Television. “We think you’re not looking to see cuts until the second half of the year.”
Federal Reserve
The Fed is widely expected to keep its benchmark rate at the highest level in two decades as policymakers assess the lagged impact of their aggressive series of hikes since early 2022.
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As central bankers gather Tuesday to begin two days of deliberations, they’ll have fresh inflation data in hand. The core consumer price index is seen reinforcing expectations that Chair Jerome Powell, at his press conference the following day, will acknowledge both the progress made on inflation as well as the risks of stubborn price pressures.
The core CPI for November, which excludes food and fuel for a better snapshot of underlying inflation, is projected to climb 0.3% from a month earlier, when it rose 0.2%. Compared with a year ago, forecasters see a 4% advance that indicates that inflation is abating only gradually.
The inflation figures follow Friday’s solid labour-market report that showed healthy growth in employment and wages, along with a decline in the jobless rate.
Nonetheless, there are indications demand across the economy is cooling as the year draws to a close. November retail sales data on Thursday are expected to reveal consumers are becoming more guarded.
At the end of the week, industrial production figures are seen showing a partial rebound in factory output as striking auto workers returned to assembly lines.
European Central Bank
President Christine Lagarde will probably try to temper market expectations that price in a quarter-point European Central Bank rate cut in April.
While the eurozone could well be in a recession, and policymakers acknowledge that the labour market is showing signs of turning, they aren’t fully convinced that the danger to consumer prices has passed, and want to see more wage data.
Executive Board member Isabel Schnabel has called the inflation slowdown so far “remarkable,” and said that further rate hikes are now unlikely. But she hasn’t pivoted much further. One colleague, Peter Kazimir of Slovakia, termed expectations for a rate cut in the first quarter of 2024 “science fiction.”
Lagarde will present new forecasts, accompanied by a collective view on the risks to growth and inflation, that will likely be a central component of the ECB’s messaging to counter market speculation.
