Unlike the previous easing cycle during the pandemic, where central banks had to scramble to ease quickly, this one is slow moving. Central banks will ease at different paces and by different amounts. The Swiss National Bank and Swedish Riksbank have already started to cut rates, and the ECB is likely to be next with a cut on June 6th, 2024.

The Standard Bank believed that the Fed is on track to start rate cuts from September but, more than any other G10 central bank, the scope for rate cuts is dependent on improving inflation data. Last week’s CPI data was a start. The 0.3% monthly rise in core prices was a tenth below the outcome in the first three months. If it is consistent with a 0.2% rise in core PCE prices (PCE prices are tending to run a bit below the CPI), for an annualised rise of just over 2%, then this would mark a positive step on the path to lower policy rates later in the year.

This bank suspected that core PCE prices needed to average around 0.2% for the next few months to put a September rate cut in the frame. Quite clearly, other factors could help tip the balance. If the labour market were to suddenly weaken significantly, then the Fed’s leeway to cut rates in the face of above-target inflation might increase. However, it thinks it unlikely that other sectors of the economy, such as the labour market, will impinge on Fed policymaking.

In short, inflation performance is likely to remain the key. Beyond September, the Fed should be able to ease at a slow pace initially, by 25-bps per meeting. This pace could accelerate in 2025 but only if inflation falls sharply and/or the labour market starts to implode. What does this outlook suggest for the Treasury market? Yields at the front end of the curve should decline to follow Fed easing, and this should lead to the return of a positive 2s-10s curve from around -40 bps at the moment.

“Persistent inflation risks, quantitative tightening by the Fed, a higher neutral rate and government budget concerns could all conspire to limit  the degree to which longer-term yields can decline even in the midst of an easing cycle. But we have to say that we are quite calm about these threats. We look for 10-year yields to slip back below 4% next year while the 2s-10s curve turns positive to the tune of 50-bp, or more”, said the Standard Bank.

While the stalling of inflation in the US at levels around 3-3.5% has raised question marks about swift rate cuts from the Fed, UK inflation continues to fall and should open up room for policy easing this summer. The UK inflation is now on a par with the US and, after this Wednesday’s CPI release for April, should be close to the 2% target. While this sharp fall in the annual rate will largely be down to the accumulation of past reductions in wholesale energy prices, which brought relief to household bills in April, the core rate is also expected to fall quite sharply from 4.2% to 3.6%. This fall in inflation, and consequent rise in real rates (assuming we use current inflation as a proxy for inflation expectations) threaten to tighten financial conditions too much, and so bring forward a cut in base rates. A number of members of the MPC have suggested that the first cut will be in the summer, which means either June or August (there is no meeting in July).

The Standard Bank leaned toward the August meeting, partly because it thinks that inflation data could slightly disappoint the market – and the MPC. However, it doesn’t doubt that the odds are pretty close to 50:50 and if the data, starting with this week’s CPI release, is far better than expected, it doesn’t hesitate to switch this call to the June meeting.

While the timing of rate cuts from the Fed and BoE is uncertain, there are no such questions about ECB policy. The Bank has been explicit in its calls for rate cuts to start in June and, more recently, equally consistent that there should not be a follow-up cut at the July meeting. It is not unusual for the ECB to provide such clarity with respect to future policy, and we have no reason to doubt that the bank will deliver on its ‘promises’. There have been times in the past when it has moved too quickly. In 2011, for instance, it started to tighten policy when other G10 central banks held steady, and was forced to start easing again a short time afterwards. It is possible that a decision to cut in June could prove rash, although many people don’t think that’s likely.