In its Global Economic Outlook, Citi economists said they expect the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BOE) to cut interest rates in September.
The bank said its forecasts aim to balance three main themes: resilient service sectors, persistent inflation above official targets, and persistent geopolitical pressures. Despite these headwinds, Citi's global growth outlook remains largely unchanged from the previous month, with an expected slowdown to 2.3% this year from 2.7% last year. This slowdown is primarily concentrated in developed markets.
“Our forecasts predict a shift in consumer spending toward goods, which should help cushion labor markets and moderate services inflation,” Citi economists noted. They expect that the decline in the value of consumer goods purchased during the 2020-2021 pandemic spending boom, coupled with the introduction of new devices featuring artificial intelligence applications, will drive this shift in spending.
Earlier this month, the European Central Bank cut its deposit rate by 25 basis points, however, this move was accompanied by relatively tight communications.
“The board was clearly concerned about the tone of the latest pay data, which has continued to escalate,” Citi noted. Despite the reduction, inflationary pressures, especially from wages, remain a concern.
Citi analysts now expect the Fed, European Central Bank and Bank of England to begin interest rate cuts in September, and expect interest rates to continue falling throughout 2025.
“To be clear, this call for simultaneous cuts in September reflects our reading of domestic inflation pressures in each economy,” the economists said in a note.
“However, especially during this cycle, central banks have shown a clear preference for moving together, at least to the extent that economic conditions allow.”
In recent months, major central banks have struggled to find an exit strategy, with the Federal Reserve at the forefront. After Chair Powell's upbeat press conference in December, markets expected smooth interest rate cuts from the Fed. But stronger-than-expected first-quarter inflation has dampened these expectations, and although April data showed a slight improvement, inflation remains very high.
“In response, the Fed pulled back on its easing plans,” the economists said.
“The winter saw markets price in as many as six rate cuts for the year, with exits expected as early as March. But markets are now only seeing one or two cuts this year, with the full cut not priced in until December.
In the Eurozone, the European Central Bank's decision to cut interest rates was driven by the need to address wage inflation and the overall economic recovery. The eurozone economy appears to be going through a restricted recovery phase, affected by ongoing monetary restrictions and less accommodative fiscal policies. Citi expects at least two further interest rate cuts from the European Central Bank this year, with an eventual interest rate of 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 in a holding pattern until September, when it will join the Fed and the European Central Bank in cutting interest rates.