The global economic outlook, as reported by Citi economists, suggests that major central banks such as the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BOE) are likely to cut interest rates in September. This forecast is based on the balancing of three key themes: resilient services sectors, persistent inflation above official targets, and ongoing geopolitical pressures. Despite facing these challenges, Citi’s global growth forecast remains relatively unchanged, with a projected slowdown to 2.3% this year from 2.7% last year, primarily seen in developed markets.
The economists at Citi anticipate a shift in consumer spending towards goods, which is expected to help alleviate pressures in labor markets and services inflation. This change is attributed to the depreciation of consumer goods purchased during the pandemic spending boom of 2020-21, as well as the introduction of new devices featuring AI applications. The recent rate cut by the ECB was driven by concerns regarding wage inflation, despite the relatively hawkish communication that accompanied the decision. Inflation pressures, particularly from wages, continue to be a major concern for central banks.
The Federal Reserve has faced challenges in finding an exit strategy, with Chairman Powell’s optimistic December press conference leading markets to expect smooth rate cuts. However, stronger-than-expected first-quarter inflation dampened these expectations, causing the Fed to backtrack on its easing plans. The markets, which initially priced in as many as six rate cuts for this year, now anticipate only one to two cuts, with a full cut not expected until December.
In the Eurozone, the ECB’s decision to cut rates was driven by the need to address wage inflation and support the overall economic recovery. The euro-area economy is currently experiencing a restrained recovery phase, influenced by ongoing monetary restrictiveness and less accommodative fiscal policies. Citi predicts at least two more rate cuts by the ECB this year, with a terminal rate of 2%. The Bank of England, on the other hand, has been alarmed by stronger-than-anticipated inflation data.
Citi analysts project that the Fed, the ECB, and the BOE will all initiate rate cuts in September, with further reductions expected to continue through 2025. The decision for synchronized rate cuts in September is based on the analysis of domestic inflation pressures in each economy. Central banks have historically preferred to move together during economic cycles, as long as economic conditions allow for it. Overall, the global economic outlook suggests a challenging period ahead for central banks as they navigate inflationary pressures and seek ways to support economic growth.