Citi sees the Fed, the ECB, and the BOE all cutting rates in September

In its report on the global economic outlook, Citi economists said they expect the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BOE) will all cut interest rates in September.

The bank said its forecast aims to balance three key themes: resilient services sectors, persistent inflation above official targets, and ongoing geopolitical pressures. Despite these headwinds, Citi’s global growth forecast remains largely unchanged from the previous month, with an expected slowdown to 2.3% this year from 2.7% last year. This deceleration is primarily concentrated in developed markets.

“Our forecast envisions a rotation of consumer spending toward goods, which should help take the heat out of labor markets and temper services inflation,” Citi economists noted. They anticipate that the depreciation of consumer goods purchased during the 2020-21 pandemic spending boom, along with the introduction of new devices featuring AI applications, will drive this shift in spending.

Earlier this month, the ECB cut its deposit rate by 25 basis points, however, the move was accompanied with relatively hawkish communication.

“Clearly, the Governing Council was concerned about the tone of recent wage data, which has continued to run hot,” Citi observed. Despite the cut, inflation pressures, particularly from wages, remain a concern.

Citi analysts now project that the Fed, the ECB, and the BOE will all initiate rate cuts in September, and expect the rates will continue to be reduced throughout 2025.

“To be clear, this call for synchronized September cuts reflects our reading of domestic inflation pressures in each economy,” economists said in a note.

“However, especially through this cycle, central banks have shown a distinct preference for moving together, at least to the extent that economic conditions allow.”

In recent months, major central banks have struggled to find an exit strategy, with the Fed at the forefront. Following Chairman Powell’s optimistic December press conference, markets expected smooth Fed rate cuts. However, stronger-than-expected first-quarter inflation dampened these expectations, and while April’s data showed slight improvement, inflation remains too high.

“In response, the Federal Reserve has backpedaled on its easing plans,” economists said.

“The winter saw markets price in as many as six rate cuts for this year, with the exit expected to come as early as March. But the markets now see just one to two cuts this year, with a full cut not priced in until December.”

In the Eurozone, the ECB’s decision to cut rates was driven by the need to address wage inflation and the overall economic recovery. The euro-area economy appears to be in a restrained recovery phase, influenced by ongoing monetary restrictiveness and less accommodative fiscal policies. Citi forecasts at least two more ECB rate cuts this year, with a terminal rate of 2%.

The BOE, meanwhile, has been spooked by stronger-than-anticipated inflation data. As a result, Citi believes the BOE is likely to remain on hold until September, when it will join the Fed and the ECB in cutting rates.


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