Will June be the month when the ECB, the Fed and the Bank of England cut interest rates for the first time?

Author: Azad Zangana, Senior European Economist & Strategist at Schroders

The Bank of England (BoE), the US Federal Reserve (Fed) and the European Central Bank (ECB) have all held rates in March. And, following the outcome of their rate-setting meetings, market expectations now point to all three central banks cutting rates in June.

Meanwhile, the Bank of England's Monetary Policy Committee has decided to keep the UK policy rate unchanged at 5.25% for the eighth consecutive month.

As in the eurozone and the US, inflation in the UK has been moderating, but the committee is still looking for evidence that it is approaching its target on a sustainable basis.

Annual inflation in the UK, as measured by the consumer price index, has fallen from a peak of 11.1% in October 2022 to 3.4% in February. This represents the lowest rate of price increase since September 2021.

Pressure increases on the BoE to cut rates

With the UK economy in recession, pressure is mounting on the Bank of England to start easing policy. The language of the Monetary Policy Committee has shifted from signaling that interest rates would stay higher for longer, to suggesting that interest rates may come down, but remain tight.

However, although in the minutes of its last meeting the Committee acknowledges that inflationary pressures have eased in the near term, it also states that indicators of inflation persistence remain elevated.

Overall, the decision to hold rates is not a surprise, and although the MPC minutes suggest that rate cuts are closer, there is little indication that easing is imminent. There has also been a slight shift in the votes of the MPC members, with the one member who had voted for a hike joining the rest and voting for no change. "Meanwhile, only one of the nine committee members voted in favor of a cut (again)."

Market expectations for the first interest rate cut have shifted from the last weeks of August to June, as inflation has fallen below the Bank of England's forecasts.

According to Schroders forecasts, the BoE would cut its interest rates from May, but it appears that the central bank is waiting for confirmation that inflationary pressures, particularly the contribution from the services sector, have eased further.

The MPC's caution may mean that the cut will come a month later, in June, as most market participants currently expect. Consequently, we have also adjusted our forecast that the first cut will occur in June.

Markets expect June rate cuts from the ECB, the Fed and the BoE

Financial markets also seem to be coalescing around June for the ECB and Fed to start cutting rates.
Prior to the ECB Governing Council earlier this month, Schroders forecasts indicated that the ECB would cut rates this month (March), which proved too premature following the outcome of the rate-setting committee.

Although the ECB staff projections showed inflation returning to target at the two-year horizon, the Council decided to wait for more data to confirm the likelihood of a lasting improvement in inflation.
In the Q&A session during the ECB press conference, President Lagarde suggested that much more data would be available for the June meeting, but not enough for April, which is the strongest indication to date that June is considered a key month.

Accordingly, we have updated our rate forecasts, with the Bank of England and the ECB cutting their respective interest rates in June, in line with our forecast for the Fed, the latter supported by the outcome of the March FOMC meeting.

We continue to expect the ECB to make four cuts this year, totaling 100 basis points (bps), while our forecasts call for the Bank of England and the Fed to make cuts of 75 bps each.