In its analysis of global economic forecasts, Citi’s team of economists indicated their expectation that the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BOE) will reduce their interest rates in September.
The financial entity explained that its prediction tries to find a balance between three main factors: the good performance of the service sectors, the continued presence of inflation rates higher than the objectives set by the authorities and the persistent geopolitical tensions. Even with these challenges, Citi’s projection for global economic growth remains largely the same as last month, forecasting a decline to 2.3% this year from 2.7% a year ago. This reduction is mainly observed in the economies of developed countries.
“Our prediction suggests a shift in consumer spending toward physical products, which should ease demand for labor and reduce inflation in the service sector,” Citi economists stated. They expect the lower value of goods purchased during the 2020-21 pandemic spending surge, as well as the introduction of new products with AI capabilities, to encourage this shift in spending patterns.
At the beginning of the month, the ECB reduced its deposit rate by 0.25 percentage points, but the announcement was made with statements indicating a tight monetary policy stance.
“It is clear that the Governing Council was concerned about recent trends in wage data, which have been consistently high,” Citi said. Despite the rate reduction, the bank still considers inflation, especially from wages, to be an important issue.
Citi analysts now predict that the Fed, ECB and BOE will begin lowering interest rates in September, and see a continuation of rate cuts through 2025.
“To clarify, our forecast for rate cuts to occur simultaneously in September is based on our analysis of domestic inflationary pressures in each of the economies,” the economists wrote in a statement.
“However, during this period it has become clear that central banks tend to prefer to act in concert, to the extent that their individual economic situations permit.”
In recent months, major central banks have faced difficulties in developing an exit strategy from their current policies, with the Fed leading the charge. Following Chairman Powell’s hopeful press conference in December, the market anticipated a smooth progression of Fed rate cuts. However, higher-than-expected first-quarter inflation rates have tempered those expectations and, Despite a slight improvement in April data, inflation remains excessively high.
“As a result, the Federal Reserve has reversed its previous plans to ease monetary policy,” the economists explained.
“The market had initially forecast up to six rate reductions this year, expecting them to begin as early as March. But now, the market anticipates only one or two reductions this year, and the first full reduction is not expected until December.”
In the eurozone, the ECB’s rate cut was motivated by the need to manage wage-driven inflation and support the overall economic recovery. The eurozone economy appears to be experiencing a moderate recovery, affected by the persistence of restrictive monetary policy and less favorable fiscal policies. Citi expects at least two additional ECB rate cuts this year, aiming for a final rate of 2%.
The BOE, for its part, has been alarmed by inflation figures that have exceeded expectations. As a result, Citi believes the BOE will maintain its current rates until September, at which time it will align with the Fed and ECB in pursuing rate cuts.
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