Against many expectations, both the Bank of England and European Central Bank both kept interest rates at their current status quo yesterday: at 5.25 percent 4.0 percent respectively.
This followed Wednesday’s FOMC decision to also hold rates, in keeping with the ‘higher for longer’ stance central banks have been touting since 2021.
Despite this, market analysts and experts have reacted almost unanimously with the expectation that these ‘non decisions’ for December 2023 will be followed by numerous rate cuts in 2024 – some predicting up to as much as 100 basis points, despite the Federal Reserve saying in its outlook earlier this week that it planned on lowering interest rates more gradually over the coming three years, with a maximum of 75 basis points likely for 2024.
This has, unsurprisingly, had quite an ‘early Christmas’ effect on a lot of markets. The Dow Jones rocketed to an all-time high of over 37,000.00 on Wednesday, the S&P500 climbed to to 14,707.00 for the first time since January 2022 and the Nasdaq also rose to 14,733.96. The dollar itself was less bullish after the Fed’s announcement. It weakened in the face of the CAD for three successive days, with the USD/CAD trading at around 1.3390 on the morning of December 15th.
The dollar’s threat was the pound’s opportunity, with the markets responding favourably to the BoE making their decision to hold rates steady imply a far more hawkish attitude than the Fed. Minor pairs reflected this, favouring an upside for the pound. The EUR/GBP dropped to below 0.8580 this week, while the GBP/USD increased steadily, hovering at around 1.2700 for days in spite of all the big announcements for the week.
Are interest rates dropping for 2024?
Probably, yes… but maybe not. When we look at the interest rate decision announcements of the week, things are looking quite different in the United States as compared to England and Europe. While the FOMC unanimously voted to keep rates unchanged, things were more divisive overseas.
According to the Bank of England, its Monetary Policy Committee “voted by a majority of 6–3 to maintain Bank Rate at 5.25 percent. Three members preferred to increase Bank Rate by 0.25 percentage points, to 5.5 percent.” This, if it had been approved, would have been the highest interest rate in the United Kingdom in close to twenty years.
Meanwhile, ECB president Christine Lagarde, in their rates decision press conference on the same day, said that:
While inflation has dropped in recent months, it is likely to pick up again temporarily in the medium term… We are determined to ensure that inflation returns to two percent in a timely manner. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary.”
What does it actually mean?
Interest rates being lowered is often interpreted as a sign to economies that the bearish times are over. Unemployment is down, consumer spending is up and big projects for various industries can ramp up again, now that the lending rates for companies’ loans is less expensive. And, indeed, these things are happening – for America, at least. However… these rate cuts haven’t actually happened yet.
What investors are seeing and fund managers are pricing in, is a fundamentally different message to what central banks are actually saying right now – particularly Europe’s and the BOE.
In our recent article on this, Allan Gray’s Thalia Petousis explained that central banks’ decisions were not only guided by keeping inflation under control, but also keeping government spending afloat (read it here). Still, with the cost of living a thorn in the side of many countries worldwide (wage freezes in the UK remain a sore point) and with economic slowdowns predicted widely for 2024, how long can ‘higher for longer’ actually sit well with consumers in the street?
We’ll all have to wait and see, when the next interest rate announcements roll around in early 2024, if the market is simply seeing what it wants to see, or if rate cuts are actually coming as fast and as furious as most people want them to.