What will happen to interest rates in 2024? That’s what the experts say

The surge in inflation has now noticeably subsided on both sides of the Atlantic. The 2 percent inflation target of the central banks is now more likely to be within reach again.

This leads to interest rate cut fantasies on the financial markets. Some monetary authorities are already warning against exaggerating interest rate cut speculation.

In mid-December, ECB President Christine Lagarde tried everything to contain the speculation: “We haven’t discussed interest rate cuts at all.” There is a whole plateau between interest rate increases and decreases, where it is important to maintain the monetary policy course. Bundesbank President Joachim Nagel was particularly clear. The interest rate peak has probably been reached. “I would say to everyone who is speculating on an imminent interest rate cut: be careful, some people have already speculated.”

First interest rate cuts in March or April?

The prices on the financial market currently include ECB interest rate cuts totaling 1.50 percentage points for 2024. This means that the market deposit rate that financial institutions receive if they park excess liquidity with the central bank would be 2.50 percent at the end of 2024. It currently stands at 4.00 percent. The key interest rate at which banks can obtain fresh money from the central bank is currently 4.5 percent. The first interest rate cuts are expected in March or April.

Jens Eisenschmidt, chief European economist at the US bank Morgan Stanley, is cautious: “We stick to our basic assumption that the ECB will not cut interest rates before June next year, but we see two risks.” The first downward step could be stronger than the 0.25 percentage points he expected. “And it could happen sooner.” The inflation shock was large when the price surge began. The monetary policy response to this was just as severe. “And we may well end up being surprised at how inflation develops on the way down, given all the powerful forces impacting the euro area economy.”

Interest rate cut fantasies among many economists

Commerzbank chief economist Jörg Krämer warns against a hasty change by the ECB. “If the ECB gives in early, there is a risk that inflation will ultimately settle at a level that is too high and the ECB will be forced to resume its interest rate increases in order to restore its credibility.”

In the USA, Fed Director Christopher Waller had already sent a signal at the end of November that a new era of interest rate cuts would soon begin. There are good economic arguments for easing monetary policy if inflation continues to fall for another few months, he said, triggering fantasies of interest rate cuts.

With their interest rate outlook in the middle of the month, the US monetary authorities made it clear that after the previous, sometimes aggressive monetary policy increases, they wanted to lower interest rates again in 2024 – probably by 0.75 percentage points. None of the Fed leaders see interest rates at the end of next year being higher than they are now, which the central bank has recently cemented in the corridor of 5.25 to 5.50 percent for three meetings in a row.

Financial markets euphoric

The financial markets appeared euphoric at the prospect of falling borrowing costs. The team led by Deutsche Bank expert Jim Reid points out that up to six interest rate steps downwards are expected for 2024: “That is normally a pace that one could expect in a recession.” However, this is not the base scenario of the US central bank, which assumes a so-called “soft landing”.

Accordingly, the Fed would be able to contain inflation without causing a deep recession and without causing distortions in the labor market. US Treasury Secretary Janet Yellen also expects the central bank to achieve such a soft landing. Powell’s predecessor at the head of the Fed does not consider the risk of a recession to be particularly high. The fact that investors still expect an aggressive approach to lowering the key interest rate level shows that the signals from the central bankers in the USA are not being adequately received by the market.

“Comments from the US Federal Reserve, which were intended to bring some relief to the high interest rate cut expectations, are being ignored by the market in the usual style,” says Jochen Stanzl, chief market analyst at CMC Markets. “As long as the boss in the persona of Jerome Powell continues to play the music, conservative tones from individual central bank members will fade away like the rustling in the forest of leaves.” After the latest interest rate decision, Powell emphasized that the question of when easing would be appropriate was coming into focus: “That will be an issue for us.” The Fed chief thus set the tone for 2024, which is likely to mark an end to high interest rate policy in the USA and probably also in the Eurozone.