The timing of the first interest rate cut is becoming clearer in the majority of developed markets (DMs) and analysts at Goldman Sachs now expect both the Federal Reserve and the European Central Bank (ECB) to implement their first cut in June.
The Bank of England and the Bank of Canada are also expected to start reducing rates in that month.
When it comes to the pace of rate cuts, there is less clarity, “especially since central bankers have been reluctant to provide guidance too far in advance,” analysts noted.
In a bid to try and benchmark the pace of rate cuts, analysts analyzed historical data on G10 countries' soft landings.
They highlighted four key patterns in central banks' rate-cut strategies:
1) On average, three rate cuts totaling 105 basis points occur within the first six months of a cycle.
2) Often, these cuts are frontloaded, with three consecutive reductions happening in over half of the cases.
3) Rate cuts are quicker if inflation is below target or if economic activity worsens significantly.
4) Central banks tend to increase the pace of cuts when unemployment rates rise, once the rate-cut cycle has commenced.
“These patterns support our forecasts that the major DM central banks will cut for at least three consecutive meetings starting in June, continue to cut consecutively in economies like the Euro Area and UK where growth remains below trend,” analysts said in the note.
On the other hand, the pace of cuts will likely be slower in the US, where economic activity “remains resilient.”