HSBC forecasts the European Central Bank (ECB) and the Bank of England (BoE) to initiate rate cuts in June and August 2024, respectively, aligning with central bankers' need for more confidence in disinflation before easing monetary policy. Recent comments from ECB Chief Economist Philip Lane and BoE Deputy Governor Ben Broadbent highlight the importance of gaining assurance that inflation is on a sustainable path towards the 2% target. Despite a slight decline in eurozone inflation in January, the fall was smaller than anticipated, partly due to persistent services inflation. Other factors, such as robust labor markets and entrenched productivity weaknesses, could further delay the disinflation process, leading central bankers to wait several months before feeling confident enough to reduce rates.
Central Bankers' Caution: Both the ECB and BoE emphasize the need for greater confidence in reaching their inflation targets before considering rate cuts.
Inflation Dynamics: January saw a modest decrease in eurozone inflation, but services inflation remains sticky, indicating potential challenges in the disinflation trajectory.
Labor Market and Productivity Concerns: Low unemployment rates and ongoing productivity issues may contribute to sustained unit labor cost inflation, complicating the path to desired inflation levels.
Rate Cut Projections: HSBC predicts the ECB will commence easing in June, followed by the BoE in August, suggesting a more cautious approach than current market expectations.
HSBC's analysis suggests that while underlying inflation in the eurozone and the UK is expected to decline throughout 2024, central banks are likely to adopt a wait-and-see attitude before initiating rate cuts. The persistence of certain inflationary pressures, robust labor markets, and productivity challenges are anticipated to make central bankers hesitant to cut rates prematurely. As a result, HSBC's forecast for the timing of the first rate cuts by the ECB and BoE extends into the middle of the year, later than some market expectations.