Daily Management Review

How Likely Is The US And UK To Follow Europe In Lowering Interest Rates?


How Likely Is The US And UK To Follow Europe In Lowering Interest Rates?
Countries all around the world are changing course after forcing borrowing costs considerably up in recent years in an attempt to stem skyrocketing prices. The primary lending rate of the European Central Bank (ECB) was lowered from an all-time high of 4% to 3.75% on Thursday, marking the bank's first interest rate reduction in five years.
It was followed by Canada the day before, and it was one of several similar actions taken in recent months by Sweden, Switzerland, Brazil, and Mexico. At their meetings this month, officials in the US and the UK are anticipated to hold off on making any cuts, as borrowing prices are now at their highest level in years.
However, a lot of observers believe it's only a question of time and are waiting for action until later in the summer or early fall. It's an indication that the worldwide war on inflation, which the pandemic ignited, is about to enter a new phase as optimism that price inflation is finally beginning to stabilise grows in some of the largest and most seriously impacted nations.
According to Brian Coulton, chief economist of Fitch Ratings, "it's an important move." "We're entering a new phase."
Several years ago, central banks globally raised interest rates sharply in the hopes that increased borrowing costs would burden the economy and lessen the forces driving up prices.
The actions were well coordinated in response to disruptions in the global food and energy markets that caused prices to skyrocket globally and problems with the global supply chain.
Over the past year, that cooperation has waned and become increasingly erratic.
Officials in the US, UK, and eurozone—economies that had not had inflation problems in decades—have been in a holding pattern, maintaining rates at levels that are decades above average.
Head of investment research and analysis at Hargreaves Lansdown Emma Wall said the ECB's decision is a vote of confidence that things are trending in the right way.
"What the central bank is saying today is, although it might not be coming down in a straight line, they are confident they can get inflation back down to the 2% target level," she said.
The UK's inflation rate has dropped to 2.3% from a peak of over 11% in late 2022, while the eurozone's inflation rate is at 2.6%.
The personal consumption expenditures index, which is the preferred inflation indicator used by the Federal Reserve, has decreased to 2.7% in the US. Even yet, the Fed, which led the charge to raise interest rates, has proceeded gingerly because of worry that the problem may have reached a standstill and that larger-than-anticipated growth and government expenditure may make it more difficult to fix.
Yael Selfin, chief economist of KPMG, stated that "the eurozone economy is in a different place than the US."
As of right now, a lot of forecasts expect the US, the UK, and the eurozone to drop interest rates at least once this year, if not more, with more cuts expected in 2025.
Such actions would alleviate the burden on individuals and companies seeking loans.
However, economists predict that rates will likely decline more slowly and haltingly than they did ascend.
Central bankers run the danger of igniting an economic upswing that drives prices back up if they lower interest rates too soon.
If you proceed too slowly, the burden of increased borrowing rates may exacerbate the current economic slowdown.
Mark Wall, chief economist at Deutsche Bank, pointed out that the ECB was cautious not to commit to any more action while announcing its rate decrease on Thursday.
"The statement arguably gave less guidance than might have been expected on what comes next," he stated. "This central bank is not in a hurry to loosen its policies."
The factors that kept interest rates low in the eurozone prior to the pandemic—such as slower growth and an ageing population—are probably going to resurface and eventually push rates back towards zero, according to Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.
However, he stated that it is doubtful that the US would see borrowing costs return to the extremely low levels that were the norm in the ten years after the financial crisis, citing large budget deficits as one reason why rates will probably continue to rise.
"We will be a little slower than Europe to cut, but I think we're also going to end up at a higher interest rate when this is all over," he stated.