Money markets currently expect the Federal Reserve, the Bank of England, and the European Central Bank (ECB) to implement nearly identical easing measures until the end of next year, with the Federal Reserve expected to ease by 135 basis points (bps). It is expected. Bank of England 133bp, ECB 133bp. However, economic indicators suggest that this simultaneity may not be maintained.
So far, the Fed has cut rates by 50 basis points, similar to the ECB, and the Bank of England has cut rates by a more modest 25 basis points. Despite these parallel developments, the economic landscapes of the United States and Europe are different.
In addition to a strong labor market, the United States is showing solid economic growth, with GDP exceeding 3% and forecasts having been revised upward. These factors indicate the Fed’s rate-cutting cycle could be shallower, with final rates potentially closer to 4%.
Conversely, inflation in the euro zone is below the ECB’s 2% target, and in some countries, such as Ireland, it is below 1%. Germany, the region’s leading economy, is at risk of suffering a second consecutive year of GDP contraction.
Economists at global banks say the ECB may need to cut rates more aggressively than markets currently expect, potentially requiring cuts of 50 basis points per meeting in the first half of next year. I predict that there will be.
European economists at Nomura have suggested that the final interest rate could be slightly below 1.50%, but Morgan Stanley analysis suggests that the nominal ECB neutral rate could be as low as 1.0-1.4%. Pointed out.
Although the UK’s economic situation is not as dire as the euro zone, analysts are puzzled by expectations that the Bank of England will ease monetary policy in a similar manner as the Federal Reserve. Analysts at Goldman Sachs estimate the UK’s nominal neutral interest rate at around 2.75%, suggesting the BoE may need to cut rates further than currently expected. .
Divergence in interest rate paths could affect the foreign exchange market. If U.S. interest rates do not fall below European rates, expectations for a weaker dollar could be called into question. A strong dollar could benefit the eurozone by weakening its currency, supporting inflation and boosting exports, especially given the economic challenges faced by China, one of its major trading partners. There is a possibility.
The current uncertainty surrounding the next U.S. presidential election may make traders reluctant to adjust their interest rate expectations. However, once the political situation becomes clearer, expectations for central bank policy easing are likely to be adjusted.
Reuters contributed to this article.
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