A former BOE member predicts that the Fed may lower interest rates before the ECB takes action.

• A former member of the Bank of England predicted that the U.S. Federal Reserve will cut interest rates before the European Central Bank, going against current market expectations.
• According to LSEG data, market players are currently pricing in a 92.8% chance that the ECB will cut rates in June from the historically high level of 4%.
• The Federal Reserve has a 53.5% chance of cutting interest rates at their June meeting, according to the same database.

A former member of the Bank of England predicted that the U.S. Federal Reserve will cut interest rates before the European Central Bank, going against current market expectations.

According to DeAnne Julius, a founding member of the Monetary Policy Committee of the Bank of England, she believes that the Fed will be the first to make a significant reduction.

Central bank moves are being closely monitored by investors due to a significant decrease in inflation across major economies. The anticipation of lower rates has positively impacted equity markets since late 2023.

In late March, Switzerland became the first major economy to lower interest rates.

According to LSEG data, market players are currently pricing in a 92.8% chance that the ECB will cut rates in June from the historically high level of 4%, while the same database shows only a 53.5% chance of a cut by the Federal Reserve at their June meeting.

Julius stated that his forecast was influenced by the Fed's dual mandate, which takes into account both inflation and employment in the U.S. economy. Recent job figures indicate a robust U.S. labor market, while inflation has decreased, although it remains above the Fed's 2% target.

Quite frankly, she said that things move a little faster in the U.S. and the labor market adjusts more quickly.

Market players have reduced their expectations for rate cuts from the Federal Reserve in 2024 due to strong economic data from the United States. While they initially predicted six rate cuts in 2024, they now forecast only three such reductions.

"The labor market adjusts more quickly. I believe the Fed will make a slight move, but I suspect there could be a small adjustment somewhere in the second half of the year. This would create some space and pressure on the Bank of England, whose economy is linked to the U.S. and European economies."

The European Central Bank meeting on Thursday will be preceded by her comments. Despite the central bank's unlikely decision to alter rates at this meeting, markets are seeking insights on whether Christine Lagarde's institution will be able to reduce borrowing costs in June.

Julius stated that the ECB takes time to reach consensus due to the varying inflation rates in different countries. While some countries have high inflation, others are below the 2% target. As a result, the ECB's decision-making process is not solely based on economic analysis but also involves political and internal considerations of the different economies and their politics.

"Christine Lagarde faces a challenging task, but she performs well. However, she must proceed cautiously towards a potential agreement, as a consensus on a rate cut has not yet been reached."

At the June meeting, policymakers will consider lowering interest rates, but beyond that point, their path remains uncertain. Notably, the June gathering will be the first one for which data from spring wage negotiations will be available.

Improvements in inflation

The unexpected slowdown in headline inflation to 2.4% in March from 2.6% in February, despite the latest inflation figures from the euro zone, has raised concerns about the ECB's ability to achieve its price stability target of 2%.

AXA Investment Managers' Gilles Moëc believes that the central bank's decision to lower its inflation forecast is supported by the March Consumer Price Index print, which shows disinflation occurring at a faster rate than anticipated by the market.

Although the resilience in services prices remains a concern, the surveys on firms' future price behavior and the anemic domestic demand provide reassurance for the amount of inflationary pressure still in the pipeline. It appears that the European economy is currently stabilizing in low gear.