Central banks are likely to begin the process of easing monetary policy at the end of Q2 2024, with rates likely to remain higher than initially expected
The most recent series of hikes do not deviate significantly from FrontierView’s previous expectations about the peak of the monetary tightening cycle, but central banks’ messaging signals that the pace of cuts will be softer than anticipated. MNCs should reassess their channel’s exposure to the ongoing tightening and anticipate the potential for softer-than-expected growth. Executives should also ensure that expectations about bottom-line growth are realistic and reflect the subdued macro-economic environment.
Overview
- The European Central Bank (ECB) delivered another hike of 25 basis points amid revision to its inflation and growth outlook, with policymakers striking a sober and hawkish tone, highlighting that the space for cuts is limited.
- The Bank of England (BOE) has abstained from delivering another hike, but risks continue to persist.
- The moves come amid an uptick in inflation expectations for 2024.
- Both the GBP and the EUR eased against the USD, reflecting markets’ deteriorating expectations about growth in the eurozone.
Our View
The latest hike follows an increase in inflation expectations across Europe and the recent surge in oil prices, which will likely translate into significantly stickier inflation in 2024. While the BOE has taken a more dovish tone, the ECB has not ruled out additional hikes, and some market participants are factoring in another hike in December if inflation fails to ease more significantly. Most notably, however, the increase in oil prices and persistent food inflation signal that the space to ease monetary policy will be significantly more limited, and the cuts in 2024 will be much more subdued than initially expected.
The combination of rising oil prices, tight monetary policy, and persistent underlying inflationary pressures signals that the growth outlook for Europe is facing significant downside risks, especially considering the increasing likelihood of more timid cuts in 2024. Furthermore, MNCs should expect to see more short-term weakness for both the GBP and the EUR, which may extend into Q1 2024. Given the deteriorating outlooks for the eurozone and the UK for 2024, the EUR and the GBP are likely to see a minimal appreciation at best for the whole of 2024, with risks tilted to the downside.
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