In their report on the global economic outlook, Citi economists said they expect the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BOE) to cut interest rates in September.
The bank said its forecast aims to balance three key themes: resilient service sectors, persistent inflation above official targets and ongoing geopolitical pressures. Despite these headwinds, Citi's global growth forecast remains largely unchanged from the previous month, with an expected slowdown to 2.3% this year from 2.7% last year. This slowdown is mainly concentrated in developed markets.
“Our forecast foresees a shift in consumer spending toward goods, which should help relieve pressure on labor markets and moderate services inflation,” Citi economists noted. They anticipate that the depreciation of consumer goods purchased during the pandemic spending boom of 2020-21, along with the introduction of new devices with ai applications, will drive this shift in spending.
Earlier this month, the ECB cut its deposit rate by 25 basis points; However, the move was accompanied by relatively harsh communication.
“Clearly the Governing Council was concerned about the tone of recent wage data, which has remained hot,” Citi noted. Despite the cut, inflationary pressures, particularly from wages, remain a concern.
Analysts at Citi now project that the Federal Reserve, ECB and BOE will initiate rate cuts in September, and expect rates to continue falling throughout 2025.
“To be clear, this call for synchronized cuts in September reflects our reading of domestic inflation pressures in each economy,” the economists said in a note.
“However, especially throughout this cycle, central banks have shown a clear preference for acting together, at least to the extent that economic conditions allow.”
In recent months, major central banks have struggled to find an exit strategy, with the Federal Reserve leading the way. Following Chairman Powell's upbeat press conference in December, markets expected mild rate cuts from the Fed. However, higher-than-expected inflation in the first quarter dampened these expectations, and while April data showed a slight improvement, inflation is still too high.
“In response, the Federal Reserve has backtracked on its easing plans,” the economists said.
“During the winter the markets contemplated up to six rate cuts for this year, and the exit is expected to occur as early as March. But markets now see only one or two cuts this year, and a full cut won't be priced in until December.”
In the eurozone, the ECB's decision to cut rates was driven by the need to address wage inflation and the overall economic recovery. The euro area economy appears to be in a moderate recovery phase, influenced by current monetary restrictions and less accommodative fiscal policies. Citi forecasts at least two more ECB rate cuts this year, with a terminal rate of 2%.
Meanwhile, the BOE has been spooked by better-than-expected inflation data. As a result, Citi believes the BOE is likely to remain on hold until September, when it will join the Federal Reserve and ECB in cutting rates.
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