“While central banks continue to make their monetary policy decisions based on the flow of economic data, in the United States the employment and inflation reports for the month of November were mixed: not really likely to reassure the Fed, but not sufficiently ‘hawkish’ either to call into question expectations of an additional rate cut in fed funds rates in December,” explains Crédit Agricole.
A rate cut from the Fed of 25 basis points next week is still expected: the Fed is expected to raise the target range for fed funds rates to 4.25%-4.50%, a total easing of 100 basis points for the year 2024. However, the resilience of the American economy and the slowing down of the disinflationary process clearly argue in favor of a more gradual easing of monetary policy afterwards.
“We anticipate a Fed pause in January and only 50 basis points of rate cuts over the whole of next year (i.e. two 25 basis point cuts in March and June). The Fed would then make a extended pause with the upper limit of its rates at 4%”, announces Crédit Agricole.
“Unlike the Fed, the ECB shows increased confidence in the return of inflation to its 2% target in a sustainable manner. This week, the decision of the Governing Council to reduce key rates by 25 bps was taken unanimously, the ECB made a major change in its communication, namely the deletion of the sentence which stipulated that rates would remain ‘restrictive for as long as necessary’, the bank then continued.
Certainly, the progress made in recent months in terms of inflation has been encouraging but, as Ms. Lagarde said, the battle is not yet won. While a 25 basis point cut is fully anticipated by the markets for the next meeting on January 30, the market gives around 30% probability to a 50 basis point cut.
“A further deterioration in growth prospects – for example a deterioration in confidence surveys – could push the ECB to accelerate the pace of cuts. Ms Lagarde said the neutral rate had not been discussed, but “it is a little higher than it was before, for multiple reasons “and previous analyzes by the ECB indicated a range of 1.75% to 2.50%”, reports Crédit Agricole.
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