The most aggressive central bank tightening cycle for decades is reaching its finale and interest rates are forecasted to go down soon. This is our guide to global central banks as we enter another round of crucial meetings over the next few weeks.
The market has long been pricing in interest rate cuts from major central banks toward the end of 2023, but sticky core inflation, tight labor markets, and a surprisingly resilient global economy are leading some economists to reassess.
However, major central banks are expected to pause rate hikes soon. Now it’s not so clear when will interest rates go down. Find out what economists and strategists are expecting over coming quarters.
When Will Interest Rates Go Down?
- US: The Federal Reserve is expected to pause rate hikes at 5.5 and cut interest rates from 1Q2024.
- Eurozone: The European Central Bank is expected to pause rate hikes at 4.50 and cut interest rates from 2Q2024.
- UK: The Bank of England is expected to pause rate hikes at 5.5 and cut interest rates from 2Q2024.
- Canada: The Bank of Canada is expected to pause rate hikes at 5.0 and cut interest rates from 1Q2024.
- Australia: The Royal Bank of Australia is expected to pause rate hikes at 4.35 and cut interest rates from 2Q2024.
- Turkey: The Central Bank of Turkey is expected to pause rate hikes at 32.50 and cut interest rates from 4Q2024.
How long will interest rates stay high?
The major central banks around the world have raised their interest rate multiple times since the beginning of 2022, boosting it from near-zero up to even 5% to cool down the scorching inflation that set in as the economy recovered from the pandemic.
The rate hikes have added friction to the economies in several ways, putting upward pressure on credit cards, mortgages, and other consumer loans. High interest rates have also made business harder for banks, which have grown more reluctant to lend money.
Both of those factors have dragged down the ability of consumers to buy things, and of businesses to hire and expand, raising fears of an impending recession. To the surprise of many economists, however, unemployment has stayed low, and a severe slowdown has yet to materialize, while inflation has simmered down.
At some point, the Central Banks will shift out of inflation-fighting mode and begin to lower interest rates again, though that day could be a long way off.
They could keep its benchmark interest rate at least at its current level—the highest since 2001 in the US or 2008 in the UK, and a record high in the EU—through the end of the year and beyond.
When will interest rates go down in the US?
According to the US interest rates forecast for the next 5 years (projected interest rates in 5 years in US), the 25bp hike in July marks the top. A six-month pause and then 50bp of rate cuts in the first quarter of 2024, with Fed funds hitting 3% by the end of 2024.
After categorizing the June pause as a slowing in the pace of rate hikes the Federal Reserve has unanimously voted to raise the Fed funds target range 25bp to 5.25-5.5% in July, the highest level for 22 years.
With the main discussion being whether the Fed might modify its tone and shift to a more neutral, data-dependent attitude, markets, and economists saw little likelihood of any other conclusion. Analysts consider that the Fed has maintained it's leaning towards tightening, suggesting additional policy firming "may be appropriate". The June forecast update, which indicated the likelihood of one more rate increase later in the year, was brought up once more by Chair Powell. The statement also noted that employment gains were "robust," activity was rising at a "moderate pace," and inflation was still "high."
Chair Powell emphasized that the intermeeting data was largely in line with their forecasts and mentioned the additional rate they included in their June forecast update, bringing the policy rate range to 5.5-5.75%. Although just five basis points of tightening have been anticipated for the September FOMC meeting, markets are split on whether a 25-basis point increase will occur by the November FOMC meeting.
Interest Rates Forecast in the US
Traders are betting that the Fed won’t raise its rate anymore, and will begin to cut it next May, according to the CME Group’s FedWatch tool, which forecasts Fed rate hikes based on Fed futures trading data.
According to Trading Economics global macro models and analysts' expectations Interest Rate in the United States is expected to be 5.50 percent by the end of this quarter. In the long term, the United States Fed Funds Rate is projected to trend around 4.75 percent in 2024 and 3.50 percent in 2025.
Why could interest rates go down in the US from 1Q2024?
After the most aggressive monetary policy tightening cycle in 40 years, cracks are starting to form. The housing market is deteriorating, business sentiment is in recession territory, and recent banking stresses mean lending conditions will tighten considerably. The chances of a hard landing for the economy are rising, which will mean inflation falls more quickly. The Fed’s dual mandate of price stability and maximum employment gives it the flexibility to respond swiftly with rate cuts.
Why could interest rates in the US stay high for a longer time?
Persistent service sector inflation caused by labor market tightness could see the Fed hike for longer. Conversely, the tighter lending standards, a debt ceiling crisis/government shutdown, and a restart of student debt repayments may create an even deeper downturn that triggers a more aggressive Fed rate cut response.
When will interest rates go down in the EU?
The EU interest rates forecast for next 5 years (projected interest rates in 5 years in EU) shows the first-rate cut will not be before the second quarter of next year, but a sharper drop in inflation and an abrupt easing of monetary policy in the US could force the ECB to loosen monetary policy in early 2024.
The ECB lowered its key rate to 0% in 2016, maintaining the zero-rate policy until July 2022, when it raised Eurozone interest rates to 0.5% – the first rate hike since 2011 – to curb the soaring inflation.
Since then, the European Central Bank raised interest rates for the ninth consecutive time in July 2023 but raised the possibility of a pause in September as inflation pressures show tentative signs of easing and recession worries mount.
Fighting off a historic surge in prices, the ECB has now lifted borrowing costs by a combined 425 basis points since last July, worried that price growth could be perpetuated by both rising costs and wages in an exceptionally tight jobs market.
"There is the possibility of a hike (next time). There is the possibility of a pause. It's a decisive maybe." Lagarde said after the July meeting, adding that policymakers were "open-minded" and unified.
Interest Rates Forecast in EU
Markets had fully priced in another rate hike just a few weeks ago, but few now see a move in September (35% probability of that outcome and markets only are pricing 17 basis points of hikes over the rest of the year.
Interest Rate in the Euro Area is expected to be 4.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts' expectations. In the long term, the Euro Area Interest Rate is projected to trend around 3.50 percent in 2024 and 2.50 percent in 2025, according to our econometric models.
Why could interest rates go down in the EU from 2Q2024?
The ECB no longer desires to serve as the unrestricted lender of last resort for the eurozone's financial markets, national governments, or economic system. Even though headline inflation will decline even more, there is enough pipeline pressure in the services sector and persistently high core inflation to support future rate increases and a "high for longer" strategy. Even if tighter monetary policy further erodes the eurozone's economic outlook, the ECB won't consider changing its current course until both predicted and actual inflation are clearly moving back toward 2%.
Why could interest rates in the EU stay high for a longer time?
The pressure on service prices is the most intriguing aspect of the inflation dynamic, and the ECB is likely to pay close attention to it. While the inflation rate for goods is still declining, the price pressure for services has continued to rise in tandem with wage growth and increased demand.
According to economists, the most recent data opens the possibility of another rate increase by the ECB before the end of the year, possibly even in September.
When will interest rates go down in the UK?
The UK interest rates forecast for the next 5 years (projected interest rates in 5 years in the UK) shows that interest rates will go down from the end of 2Q2024.
In March 2020, BoE implemented two interest cuts – on 11 and 19 March – which brought the UK interest rates to an all-time low of 0.1%. The BoE’s steep rate cut followed in the footsteps of other central banks and governments that rolled out emergency measures to help their economies weather the pandemic.
The near-zero rate was kept until December 2021 as the UK and other countries gradually reopened their economies.
As inflation rose in line with recovery, the BoE increased its bank rate to 0.25% on 16 December 2021 from the low of 0.1%. The UK became the world’s first leading economy to increase its interest rate after the pandemic.
In 2022, the BoE hiked rates eight times, bringing it to 3.5% by the end of the year. In 2023, the UK central bank hiked rates two times by 50 basis points (bps) and three times by 0.25%, bringing the rate to 5.25%.
Though another rate increase in September is very likely, the Bank of England is keeping all its options open. It's unclear if that will occur again in November, especially if services inflation begins to decline more noticeably between now and then.
Interest Rates Forecast in the UK
Another 25bp hike in November will therefore largely depend on whether services inflation has failed to slow, but FX strategists forecast that 5.50% in September will mark the peak for the Bank Rate. Market pricing of a peak at 5.65% around the turn of the year therefore seems fair – and certainly much more reasonable than it did just a few weeks ago when investors briefly saw a peak Bank Rate near 6.5%.
The UK interest rates forecast for the next 5 years (projected interest rates in 5 years in the UK) shows that interest rates will go down from the end of 2Q24.
According to Trading Economics' global macro models and analysts' expectations, the Interest Rate in the United Kingdom is expected to be 5.50 percent by the end of this quarter. In the long term, the United Kingdom Interest Rate is projected to trend around 4.50 percent in 2024 and 3.25 percent in 2025.
Why could interest rates go down in the UK from 2Q2024?
The Bank of England's tightening cycle had appeared to be coming to an end, but subsequent remarks from various officials have tried to leave the door open. However, the Bank has stated that it may raise rates further if new indications of "inflation persistence" materialize. Authorities have made it clear that a significant portion of the effects of previous hikes has yet to materialize, so economists believe the hurdles for additional tightening after July continue to be high.
Why could interest rates in the UK stay high for a longer time?
If services inflation continues to trend higher and recent survey evidence showing reduced price pressures begin to revert, then the Bank could go further – though the three or four rate hikes markets are currently pricing appears extreme.
When will interest rates go down in Canada?
The Canadian interest rates forecast for the next 5 years (projected interest rates in 5 years in Canada) shows that interest rates will go down from the end of 1Q2024.
At the beginning of the COVID-19 epidemic, the BoC cut its overnight rate three times, from 1.75% to 0.25%. Canada's GDP contracted during that time by 5.5%, and inflation was expected to fall below 2% by 2020. Up until the first quarter of 2022, the bank maintained its key rate at 0.25%.
As inflation climbed to 5.1% in March 2022, the BoC started boosting interest rates by 25 bp to 0.50%. Since October 2018, it was the first rate rise by the BoC.
The BoC continued to hike rates, following in the footsteps of other central banks such as the US Federal Reserve (Fed) and the Bank of England (BoE). With the 10th rate hike in July, at the time of writing (August 2023) the overnight rate stays at 5%, marking the first time since April 2001 that the figure hit five percent.
Bank of Canada hit a pause on those hikes in January for a few months to determine whether the economy had sufficiently cooled, then resumed its campaign in June.
Interest Rates Forecast in Canada
The market is currently pricing around a 75% chance of another hike at the September meeting, and analysts feel this is about right. The tone of the statement suggests the BoC is not convinced it has done enough yet so we will need to see significant softness in activity, labor, and inflation numbers to prevent another move.
According to Trading Economics global macro models and analysts' expectations Interest Rate in Canada is expected to be 5.25 percent by the end of this quarter. In the long term, the Canada Interest Rate is projected to trend around 3.50 percent in 2024 and 3.00 percent in 2025.
Why could interest rates go down in Canada from 1Q2024?
Despite a tight labor market, inflation is declining more quickly than the BoC had anticipated. Given that mortgage rates are fixed for a shorter period and that millions of households are vulnerable to rate resets at higher levels this year and next, Canada is more sensitive to changes in central bank interest rates than the US. The downside risks for the domestic economy and inflation are increased by Canada's substantial exposure to the US in terms of financing, exports, and commodity prices.
Why could interest rates in Canada stay high for a longer time?
Canada is more exposed to central bank interest rate changes than the US, given that mortgage rates are fixed for a shorter duration with millions of households subject to rate resets at higher levels this year and next. Canada’s high exposure to the US via financing, exports, and commodity prices adds to the downside risks for the domestic economy and inflation.
When will interest rates go down in Australia?
The Australian interest rates forecast for the next 5 years (projected interest rates in 5 years in Australia) shows that interest rates will go down from the end of the 2Q2024.
After two months of 'no-change', the market has decided that the Reserve Bank of Australia (RBA) has finished hiking rates. Some analysts disagree. There has been only a modest slowdown in the economy, and most of the decline in inflation so far owes to base effects which are turning less helpful, while the run-rate for month-on-month inflation remains much higher than is consistent with the RBA’s inflation target. ING expects at least one more hike – possibly in September or maybe waiting for the quarterly inflation numbers which will be known by the November meeting – and quite possibly two. That would take the cash rate target to 4.35% with an upper risk of 4.6%.
Interest Rates Forecast in Australia
Market pricing shows only about a 20% chance of a further hike in rates in this cycle. However, economists anticipate at least one more increase, possibly two (depending on the quarterly inflation data that will be available by the November meeting), and it may happen in September. With a maximum risk of 4.6%, that would bring the cash rate target down to 4.35%.
According to Trading Economics' global macro models and analysts' expectations, the Interest Rate in Australia is expected to be 4.10 percent by the end of this quarter. In the long term, the Australia Interest Rate is projected to trend around 3.60 percent in 2024 and 2.75 percent in 2025.
Why could interest rates go down in Australia from 1Q2024?
Having paused its rate tightening in April to gather more information, the RBA will likely see a further fall in inflation rates which will not provide any justification for additional tightening at this meeting.
Why could interest rates in Australia stay high for a longer time?
The AUD currency remains strictly tied to external developments, with the Chinese growth disappointment factor is now largely priced into AUD. So even if the domestic picture will improve for AUD, the RBA may well have to hike again despite the market’s flat rate expectations.
When will interest rates go down in Turkey?
The Turkey interest rates forecast for the next 5 years (projected interest rates in 5 years in Turkey) shows that interest rates will go down from 3Q2024.
Turkey's interest rates had a history of extreme volatility, followed by a period of comparatively stable conditions for the majority of the 21st century while the CBT underwent significant structural reforms in the wake of the 2001 financial collapse that precipitated the country's economic catastrophe.
Turkey was mostly successful in keeping inflation around 10% between 2005 and 2017, and interest rates followed suit by remaining quite low. Rates dropped as low as 4.5% in 2013, as the nation moved towards the Western economic paradigm of gradual price growth in the wake of the Great Recession.
In reaction to a substantial increase in inflation in 2019, rates increased as high as 20.35 percent before dropping with the inauguration of a new central bank governor. Rates decreased to 8.25% in response to COVID-19 limits that stifled demand before increasing to 19% by March 2021.
A few days after the increase, Erdogan fired Naci Agbal as governor of the Central Bank of the Republic of Turkey. Since then, the rate has continued to decrease because of the president's insistence. Despite rising prices, it reached 8.5% in March as inflation concurrently ballooned, breaching 80% in late 2022.
Turkey’s central bank jacked up the country’s key interest rate in June, almost doubling it from 8.5% to 15% as the new economic administration of recently re-elected President Recep Tayyip Erdogan embarked on a dramatic monetary policy U-turn. A second consecutive hike came in July, with the Central Bank adding another 2.5%.
The bank said there will be further gradual monetary tightening until the inflation picture in the country improves.
Interest Rates Forecast in Turkey
The interest rate forecast for Turkey is as high as 35% during mid-2024 where it should peak, shows ING.
According to Trading Economics global macro models and analysts' expectations Interest Rate in Turkey is expected to be 22.50 percent by the end of this quarter and peak at 30 at the beginning of 2024. In the long term, the Turkey Interest Rate is projected to trend around 15.00 percent in 2024 and 12.00 percent in 2025.
Why could interest rates go down in Turkey from 3Q2024?
The Central Bank of Turkey acknowledges inflationary pressures despite the underperformance of the consensus in the previous two meetings and attributes the rise in the underlying trend to strong domestic demand, cost pressures related to wages, foreign exchange, tax increases, and a deterioration in pricing behavior.
The bank predicts a transition into a period of deflation and stabilization, with inflation reaching a top of about 60% in the second quarter of 2024.
Why could interest rates in Turkey stay high for a longer time?
However, there remains a large gap between the policy rate and both current and expected inflation. With the current pace of hikes, the real policy rate – which is in deep negative territory – will begin declining once again and will likely remain there for longer. This will likely add to pricing pressures on inflation and could potentially weigh on reserves.
In sum, will Interest rates go down in December 2023?
Even if it appears that the acute part of the crisis is gone, there is a growing perception that the recent banking stresses will have an impact on the world economy. In many cases, the most aggressive central bank tightening cycle in decades has caused cracks to begin to appear in the economy's most interest-sensitive sectors. Rate reductions are imminent, and very few anticipate the first major central banks to begin relaxing monetary policy before the end of the year.
However, for the time being, policymakers are confident they have the resources at their disposal to address financial system fragilities when they arise, allowing monetary policy to stay firmly anchored on inflation. Considering that inflation figures continue to show uncomfortably high levels across major nations, anticipate this narrative to prevail at future central bank meetings.
With some notable exceptions, central banks across the developed world look poised to raise rates further in 3Q23, pause for around 6 months, and start rates cut. That's in contrast to Central and Eastern Europe and Asia, where policy rates have largely already peaked.
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