USA: Fed backlash
The Federal Reserve is widely expected to keep the Fed Funds target range at 5.25-5.5% at next week's FOMC meeting. Weaker activity numbers, cooling labor market data and benign inflation numbers signal that monetary policy is likely tight enough to sustainably reduce inflation to 2% in the coming months, a narrative more vocally supported by key Federal Reserve officials. The bigger story will likely be in each Fed member's forecasts – to what extent will they try to support the market perception that major rate cuts are imminent? We strongly suspect that there will be a lot of headwind here. The sharp decline in Treasury yields in recent weeks represents an easing of financial conditions for the economy and there are concerns that it will effectively reverse some of the Fed's rate hikes from earlier in the year.
We expect the Fed to stick to its relatively optimistic economic view and deliver the same 50 basis point rate cuts in 2024 that it announced in its September forecasts, albeit from a lower level since the last increase was 25 basis points in December, which it had forecast last time, will not take place.
We expect the Fed to shift to a more dovish stance at some point, although this may not happen until the end of the first quarter of 2024. The Federal Reserve's interest rate hikes and the associated tightening of credit conditions are starting to have an impact. We expect rate cuts of 150 basis points in 2024 and another 100 basis points in early 2025.
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Great Britain: The Bank of England offers countermeasures to the rising tide of interest rate cut expectations
Financial markets are quickly throwing in the towel on the “higher for longer” narrative that central banks have been emphatically promoting for months. Admittedly, this market reassessment has so far been less aggressive for the Bank of England. But with three rate cuts now priced in for 2024, the Bank of England is starting to sound the alarm. Gov. Andrew Bailey has said in recent days he is pushing back against “the assumption that we are talking about rate cuts.”
Those comments followed a tightening of the bank's forward guidance in November, in which it said it expected interest rates to remain restrictive “for an extended period.” Expect this narrative to be repeated on Thursday. Our base case is a 6-3 vote for no rate change, which is in line with the November vote distribution.
Could the bank's statement go a step further and officially say that markets are overstating easing in 2024? Such comments have not been made since November 2022 in what was then a tense market environment. We doubt they will do something similar this month. Policymakers may be concerned about the recent reassessment of UK interest rate expectations, but central banks around the world have learned the hard way in recent years that trying to predict and commit to future policy with relative certainty is a fool's game. The bank will also be pleased that the data is at least going in the right direction. Service sector inflation was below the bank's latest forecast.
Markets may be right to assume that the BoE will start cutting interest rates a little later than its European neighbors. But as rate cuts begin, we expect the BoE's easing cycle to eventually become more aggressive. We expect rate cuts of 100 basis points from August next year and another 100 basis points in 2025.
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Norway: Norges Bank is leaving interest rates on ice
The Norwegian central bank had already signaled in September that an interest rate hike was likely in December. In November, policymakers watered down those promises and said further progress in the inflation outlook could lead to a pause. Since then, we have seen both a significant decline in oil prices and a significant reassessment of global interest rate expectations. Both are moderate from the perspective of Norges Bank's model-based approach to policy setting. It's a close call, but we believe the balance has shifted in favor of a rate hike at Thursday's meeting. Market prices are also trending in this direction.
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Poland: Inflation in focus
CPI (November): 6.5% YoY
We believe that the Polish Statistics Office is unlikely to significantly change its flash CPI estimate for November. As we expected, November saw a significant increase in fuel prices compared to October, while food prices also rose monthly. The decline in residential energy prices was smaller than we forecast and core inflation fell more than we forecast. The details of the November CPI readings should allow us to examine the factors behind this lower core inflation and perhaps make some adjustments to the forecast trajectory of core inflation depending on whether the November surprise was due to one-off factors or was more broad-based took place.
Current account (Oct): €2200 million
We forecast a large current account surplus in October due to a significant improvement in the primary balance (a much smaller deficit than in previous months) and continued surpluses in both goods and services trade. According to our forecasts, exports fell 3.2% year-on-year, while imports fell 11.1% year-on-year. The 12-month cumulative current account surplus improved to 0.8% of GDP from 0.6% of GDP after September.
Key events in developed markets next week
Source: Refinitiv, ING
Key events in EMEA next week
Source: Refinitiv, ING
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