The December meetings of three of the world’s leading central banks all ended in no change for their key interest rates. However, the underlying messaging from policymakers revealed an increasingly divergent tone.
- Hopes of US rate cuts drove up share prices
- UK rates are likely to remain higher for longer
- Eurozone inflation is set to post a short-term rise
The December meetings of three of the world’s leading central banks all ended in no change for their key interest rates. However, the underlying messaging from policymakers revealed an increasingly divergent tone. Although the US Federal Reserve (Fed) signalled the likelihood of looser monetary policy in 2024, the Bank of England (BoE) ruled out any chance of rate cuts until inflation has returned to its target. Meanwhile, the European Central Bank (ECB) warned that inflationary pressures are likely to intensify in the eurozone in the near term.
“It is far too early to declare victory” (Fed Chair Jerome Powell
The Fed elected to hold its key federal funds rate at a range of 5.25% to 5.5% at its December meeting. US rates remain unchanged since July and, according to updated forecasts, policymakers expect rates to fall below 5% next year. The news fuelled hopes of cuts, driving up the Dow Jones Industrial Average Index to a record closing high of 37,090.24 points. Nevertheless, Fed Chair Jerome Powell struck a cautious note, warning: “If the economy does not evolve as projected, the path of policy will adjust as appropriate … It is far too early to declare victory.” The annualised rate of US consumer price inflation continued to moderate, easing to 3.1% during November.
Although the BoE maintained its base rate at 5.25% as expected, the UK’s central bank – unlike the US Fed – crushed any hopes of imminent rate cuts, warning: “Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target.” Six policymakers voted in favour of maintaining rates at their current level, while three voted for an increase of 25 basis points. Although the UK’s rate of inflation declined to 4.6% in October, it remains well above the BoE’s 2% target; meanwhile, average wage growth moderated to 7.3% over the three months to October. The BoE expects the UK economy to stagnate during the final quarter of this year.
The ECB also maintained its key interest rate at 4%, citing the “forceful” impact of earlier tightening on the eurozone’s economy. In its statement, the ECB warned that, although the rate of inflation has fallen in recent months, it is likely to rise in the short term before returning to target in 2025. Looking ahead, policymakers believe that the risks to economic growth are still tilted to the downside.
