In their Global Economic Outlook report, Citi economists said they expect the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BOE) to cut interest rates in September.
The bank said its outlook aimed to balance three key themes: the resilience of the services sector, persistent inflation above official targets and ongoing geopolitical pressures. Despite these headwinds, Citi’s global growth forecast was little changed from the previous month, with growth expected to slow to 2.3% this year from 2.7% last year. This slowdown is primarily concentrated in developed markets.
“Our forecast assumes a shift in consumer spending toward goods, which should help ease tight labor markets and contain service sector inflation,” Citi economists said. They expect the lower cost of consumer goods purchased during the 2020-2021 pandemic spending boom, as well as the emergence of new devices with artificial intelligence applications, to fuel this shift in spending.
Earlier this month, the ECB cut its deposit rate by 25 basis points, but the move was accompanied by relatively aggressive messaging.
“It is clear that the Board of Governors was concerned about the tone of recent payroll data, which continued to get hot,” Citi noted. Despite the contraction, inflationary pressures, especially on the wage side, remain a concern.
Citi analysts now forecast that the Fed, ECB and Bank of England will initiate rate cuts in September, and expect rates to continue to fall through 2025.
“To be clear, this call for a synchronized September cut reflects our understanding of domestic inflation pressures in each economy,” the economists said in a note.
“However, especially in this cycle, central banks have shown a clear preference to act together, at least to the extent that economic conditions allow.”
Major central banks have struggled to find an exit strategy in recent months, with the Fed at the forefront. Following Chairman Powell’s upbeat December press conference, markets were expecting a gradual Fed rate cut. However, stronger-than-expected inflation in the first quarter dampened these expectations, and although April data showed a slight improvement, inflation remains too high.
“In response, the Federal Reserve stepped back from its easing plans,” the economists said.
“Over the winter, markets have seen as many as six rate cuts this year, with exits expected to occur as early as March. But this year, markets are only expecting one or two cuts, and the full cut won’t be factored in until December.”
In the eurozone, the ECB’s decision to cut rates was driven by the need to tackle wage inflation and the overall economic recovery. The eurozone economy appears to be in a limited recovery phase, impacted by ongoing monetary restrictions and less accommodative fiscal policy. Citi forecasts at least two more ECB rate cuts this year, with the final rate at 2%.
Meanwhile, the Bank of England was spooked by stronger-than-expected inflation data. As a result, Citi believes the Bank of England is likely to remain unchanged until September, when it will join the Fed and ECB in cutting rates.