Different Routes to the Same Destination as Central Banks Plot Easing Path

Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.

Eurozone Market Update

In September, the ECB cut its deposit rate by 25 bps to 3.5%. It also narrowed the spread as planned between the main refinancing operation and deposit rate facility from 50 bps to 15 bps to limit market volatility without causing significant disruption to money market activity. Eurosystem staff projections for headline inflation remained steady, but core inflation was revised up by 0.1% for 2024 and 2025, and growth forecasts were revised down by 0.1%. ECB President Christine Lagarde pledged not to pre-commit to a particular rate path and again emphasised a data-driven approach. We expect the ECB to continue easing quarterly, with another 25 bps cut likely in December. Services inflation remained sticky in August at 3.5%, up 1.8 percentage points, but that does not move the needle for a cut in October. However, September’s flash Purchasing Managers’ Index (PMI) data and Euro Area Inflation data did bring a lot of sentiment for an October cut, painting a weak growth picture with a loosening labour market. The composite PMI for the euro area fell by 2.1 to 48.9, signalling contraction and delivering the lowest level since February.

_{Source: Bloomberg, data as of 30 September 2024}

UK Market Update

The BoE Monetary Policy Committee (MPC) voted 8-1 to keep the bank rate at 5.00% in September. The vote split gave the meeting a slightly hawkish tilt as most expected two votes for a 25 bps cut. We had expected no cut, anticipating the MPC will reduce rates on a quarterly frequency in 2024 until reaching the neutral point of 3.50% in 2025. The MPC highlighted uncertainties around wage-driven services inflation, rate restrictiveness, fiscal risks and the upcoming autumn budget. While services inflation is expected to ease, headline inflation may rise. In our view, the most important sentence in the statement was: “In the absence of material developments, a gradual approach to removing policy restraint remains appropriate”. This supports our view that the MPC will proceed carefully. Markets fully price in a 25 bps cut in November, with the risks tilted to an additional cut in December.

_{Source: Bloomberg, data as of 30 September 2024}

US Market Update

In September, the Fed cut rates by 50 bps amid market debate over whether the cut would be 25 or 50 bps. While the decision to cut was unanimous, Governor Michelle Bowman favoured a 25 bps cut, marking the first dissenting voice since 2005. The FOMC statement emphasised commitment to “support maximum employment and return inflation to its 2% target”, with employment a new addition to the statement. Chair Jerome Powell clarified that the decision doesn't pre-commit future cuts. The latest Summary of Economic Projections (SEP) showed participants expect the federal funds rate to end 2024 at 4.4%, down from 5.1% in June’s SEP. The dot plot (see Chart of the Month) of FOMC members’ thoughts on future interest rates showed nine members favoured 50 bps cuts this year, nine preferred 25 bps and one saw more than 50 bps of cuts in the rest of 2024.

_{Source: Bloomberg, data as of 30 September 2024}

Looking Ahead

In September, the Fed joined other developed market central banks in shifting toward easier monetary policy. However, despite this alignment, each bank faces distinct growth and inflation challenges, setting them on diverging paths. The Fed’s approach will hinge on the balance between its dual mandate — full employment and stable inflation — and we remain cautious about market expectations for aggressive rate cuts. The BoE’s signal for a gradual pace of easing supports our view of quarterly cuts, aligning with Chief Economist Huw Pill’s “Table Mountain” analogy. Meanwhile, ECB President Lagarde has stressed that the bank is not data-point-dependent. Given the limited data available before the ECB’s October policy meeting, we believe the probability of remaining on hold is greater than that of a cut, but we acknowledge the risks are tilted to a faster pace of policy normalisation. Heading into 2025, views among the ECB will become more diverse, given continued downward pressure on growth but slow signs of disinflation in services. With the downside risk to the growth outlook, we expect some members will vote for consecutive cuts, which we believe would be warranted, ending the cutting cycle in 2025.

Chart of the Month

_{Source: Bloomberg as of 1 October 2024}

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