Who between the Fed and the ECB will be the first to cut rates?

Global growth conditions have shown modest signs of improvement, with the US continuing to outpace the Eurozone. Against the backdrop of weak global economic growth, the process of disinflation is yielding uneven results, with Europe witnessing significant progress while the US has rather seen a stabilization of core inflation over the last months as shown below.

At a time when real interest rates have become positive again, market sentiment still favours a 'soft landing' characterised by lower growth and inflation rates even if uncertainties persist surrounding the prospect of a hard or absent landing accompanied by a resurgence in inflation due to energy transition and geopolitical risks. These scenarios present a spectrum of potential monetary policy implications, particularly concerning who will be the first to reduce interest rates and the extent of these cuts.

If Fed Chair Jerome Powell has recently touted rate cuts, Minneapolis Fed President Neel Kashkari has offered more cautious outlook, saying that he did not see more than two, or even one rate cut this year. Simultaneously, Bank of France Governor Francois Villeroy de Galhau, who is an ECB governing council member, stated that the European Central Bank will "very likely" cut interest rates in the spring, fuelling market hopes that the move could take place by June.

What is certain is that the stance of the US and Eurozone central banks will be primarily dictated by incoming inflation data.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.