A signal for reductions in the cost of money in 2024 was sent by the major central banks in the last ten days.

The reduction of inflation to levels relatively close to the 2% target is the main reason that both the European Central Bank and the US central bank have more or less explicitly indicated the prospect of interest rate cuts in the coming months.

The world’s two biggest central banks did not set an exact time when they would start cutting the cost of money, noting that they want the process of deflation to go further so that they have some certainty that inflation will indeed return to the 2% target in stable base and there will be no risk of a sudden recovery. In the latter case, they would be forced to raise interest rates again after a temporary reduction, something they want to avoid in any case.

The greater certainty for the ECB that inflation will not rise is linked, as its president Christine Lagarde said, to the data on wage increases that will be agreed in the Eurozone countries in the first quarter of 2024, which will be known about the late April or early May. If these figures show that the increases are moderate – just over 4% the ECB staff predicts – then the green light for rate cuts will be given. And this, because increases of this magnitude are considered consistent with 2% inflation, as long as there is a reduction in business profit margins, which has already been happening in recent months, after their drastic increase in the two years 2022-2023.

As for the risk to inflation from fare increases due to the disruption caused by attacks by Yemen’s Houthi rebels on ships transiting the Red Sea, the ECB is not particularly concerned at the moment as it sees the impact will be limited, but there is concern in the event of a generalized conflagration in the Middle East.

Based on the above, the most likely time to reduce the interest rates of the euro, which currently hover at 4% for deposits, is at the ECB meeting in June, as not all data from collective wage agreements will be available at the previous meeting in April. However, the money market is still betting that the first reduction by the ECB will take place in April.

Fed policy

For the Fed, as its chairman, Jerome Powell, said, the greater certainty about the path of inflation is also linked to the high demand in the US economy, which grew last year at a rate of 3.1% in a year when interest rates jumped to 5 .25% – 5.5%. While GDP is growing significantly and the labor market is tight, with unemployment below or near 4%, so the Fed will be hesitant to cut interest rates, waiting for more evidence on the decline in inflation.

The most likely scenario for the Fed as well is the first rate cut to be done in the summer. Powell described as unlikely the possibility of a reduction in March as, as he said, the necessary certainty about inflation is not expected to exist then.

The stance of BoE and SNB

The Bank of England (BoE) opened last Thursday a “window” for a reduction in interest rates – amounting to 5.25% – in 2024. Most likely, thoughis this to be done later than the movements of the EKT and the Fed, because wage increases in Britain are significantly higher than in the Eurozone and the US and so a sustained rapid decline in inflation towards 2% is not expected. BoE Governor Andrew Bailey said inflation may temporarily fall below 2% in April, but is then forecast to rise again.

The Swiss National Bank (SNB) is also aiming for interest rate cuts this year as the appreciation of the franc against the euro – more than 5% over the last 12 months – has eased price pressures, with inflation falling in December for the seventh consecutive month. below the 2% target. SNB President Thomas Jordan said that there is no need for further rate hikeswhich currently amount to 1.75%.