Will the UK and US cut interest rates like Europe?

After pushing up borrowing costs significantly in recent years to try to contain soaring prices, countries around the world are shifting gears.

The European Central Bank (ECB) on Thursday announced its first interest rate cut in five years, reducing its key lending rate from an all-time high of 4% to 3.75%.

The move comes a day after Canada took a similar step and follows a series of similar moves in recent months from countries including Sweden, Switzerland, Brazil and Mexico.

Officials in Britain and the US, where borrowing costs are now at their highest in years, are expected to delay any cuts at their meetings this month.

But many analysts are eyeing action in late summer or early fall, making it just a matter of time.

It is a sign that the global fight against pandemic-induced inflation is entering a new phase, as hopes grow in some of the largest and hardest-hit economies that inflation Prices were finally under control.

“This is an important move,” said Brian Coulton, chief economist at Fitch Ratings. “We are moving into a different phase.”

Just a few years ago, central banks around the world raised interest rates aggressively in the hope that higher borrowing costs would weigh on the economy and ease the pressure on prices to rise.

The moves were unusually synchronized, aimed at addressing global supply chain problems as well as shocks to food and energy markets that sent prices soaring around the world.

That coordination has faded over the past year and has become increasingly variable.

In Europe, Britain and the United States – economies that have not had an inflation problem in decades – officials are on track to maintain interest rates, keeping them at their highest level in decades.

Emma Wall, head of investment research and analysis at Hargreaves Lansdown, said the ECB’s decision was a statement of confidence that trends were moving in the right direction.

“What the central bank is saying today is that, although it may not fall in a straight line, they are confident that they can get inflation back to the 2% target level,” she said.

In Europe, inflation is currently at 2.6%, while in the UK, inflation has fallen to 2.3%, well down from its peak of more than 11% at the end of 2022.

In the US, the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures index, fell to 2.7%.

However, the Fed, which has taken the lead in raising interest rates, has acted cautiously, reflecting concerns that progress on the issue could stall and growth be stronger than expected. as well as large government spending that could make this problem more difficult to solve.

“The euro zone economy is in a different position than the US,” said Yael Selfin, chief economist at KPMG.

Currently, many forecasters are predicting at least one more interest rate cut in the US, Europe and UK this year, with several more in 2025.

Such moves will bring relief to businesses and households looking to borrow capital.

However, analysts believe that the rate of interest rate reduction may be slower and more halting than the rate of interest rate increase.

If central banks raise interest rates too quickly, they risk creating a wave of economic activity that sends prices soaring again.

Move too slowly and the weight of higher borrowing costs could trigger a more severe recession.

Mark Wall, chief economist at Deutsche Bank, noted that in announcing the rate cut on Thursday, the ECB was careful to distance itself from promising future actions.

“The statement is said to provide less guidance than can be expected about what happens next,” he said. “This is not a central bank rushing to loosen policy.”

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, said in Europe, factors that had kept rates low before the pandemic, including slower growth and an aging population, have the possibility of reappearing, eventually bringing the ratio back close to zero.

However, he said the US is unlikely to see a return to the ultra-low borrowing costs that existed in the decade after the financial crisis, in part because large budget deficits are likely to cause pressure on interest rates.

“We will cut a little slower than Europe, but I think we will also face higher interest rates when this is all over,” he said.


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