All eyes fixed on central banks this week

It is a week packed with central bank meetings with the US Fed, the European Central Bank and the Bank of England all due to meet. As inflation comes down from unprecedented highs, following successive hikes in interest rates, the monetary policymakers are all trying to resist giving any indication of lower borrowing costs next year. Part of this is to avoid longer-term market interest rates dropping further, effectively loosening monetary conditions. Part, too, is to try to keep options.

Truth to tell, this is something of a King Canute exercise. Everyone knows that the odds are firmly stacked in favour of interest rates ending next year lower than they will start it. And that, barring something unexpected, they are unlikely to rise any further in the meantime. But the central banks want to avoid locking in expectations of interest rate cuts early in the year, before they have firmer evidence that inflation looks to be heading below the 2 per cent target level.

[ Central banks prepare to rebuff investors over path of interest rates ]

[ ‘Way too early’ to declare victory over inflation, says ECB’s Nagel ]

Wage and labour market trends are the issue now being closely watched by central banks to try to give reassurance that higher inflation is not becoming entrenched. Strong US jobs figures last Friday will give US Fed chair Jay Powell the cover to kick to touch on interest rate trends. In the EU, unemployment is also low and wages are ticking higher. But with headline inflation falling and economic conditions weak, financial markets still expect interest rates to start falling by the summer at the latest.

Whether ECB president Christine Lagarde’s recent statement that she does not expect interest rates to fall in the next couple of quarters – in other words up the middle of 2024 – stands the test of time very much remains to be seen.

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