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Point of View · 01.30.24
Where Global Interest Rates Could Head in 2024
The path of interest rates in 2024 probably depends on central banks, and central bank decisions likely will depend on inflation.
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- Fixed Income Insights
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Where Global Interest Rates Could Head in 2024
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Key Points
What it is
We analyze the 2024 outlook for central bank policies and interest rates in the U.S., the eurozone, the U.K. and Japan.
Why it matters
Interest rate expectations contribute to the performance of stocks and bonds.
Where it's going
We expect inflation to decline and central banks to cut rates this year, resulting in lower interest rates.
In 2024, we believe the path of interest rates across regions largely will follow the path of central bank rates, which will depend heavily on the path of inflation. Following an aggressive string of central bank rate hikes since 2022, we think investors are counting on central bank rate cuts this year as inflation ebbs. For most, it’s not a matter of whether the cuts will occur this year, it’s when. We analyze where rates may head across regions.
Fed Rate Cut Probably at Mid-Year
Inflation in the U.S. still sits well above the Federal Reserve’s 2% target. Supply-chain disruptions from the pandemic have largely ended, causing goods-related inflation to retreat. However, housing-related inflation and wages continue to rise, contributing to stubborn services inflation. As housing prices feed into inflation data with a lag, we follow more timely measures, which indicate that housing prices have started to soften.
With the potential softening of housing prices later, we expect that services-related inflation will relent, giving momentum to a gradual decline in overall inflation this year. As a result, we expect to follow, causing the Treasury yield curve to fall and during 2024 (Exhibit 1).
In the near-term, the ride for rates could get bumpy while investors analyze the Fed’s next move. We believe the Fed has finished increasing rates, so the question they face now is when to start cutting. Based on futures markets, investors see the around a 50% chance of the first rate cut coming in March. However, we think the Fed likely will first want a good amount of assurance that inflation will fall to its target before starting with rate cuts. So we see mid-year as more likely.
Yield Curve Flattening
The yield curve flattens when the difference between short-term yields and long-term yields decreases.
EXHIBIT 1: Potentially Lower and Flatter Yield Curve for 2024
As also reflected in one-year forward rates, we believe the yield curve will go lower and flatten as inflation wanes.
Source: Bloomberg
ECB Closely Following Wages, U.K. Rate Path May Lag
The European Central Bank also likely will want to ensure they win the battle on inflation so they don’t cut rates prematurely. In particular, we think they will follow wage inflation closely. The occurrence of annual wage negotiations throughout the first quarter suggests the end of the second quarter as the earliest starting point for cuts if there are no material changes in the economic data. As in the U.S., we expect the front end of the yield curve to fall throughout 2024.
In the U.K., we think stickier inflation will cause monetary easing to go at a slower pace than in the eurozone and U.S. Despite the easing of core and services inflation at the end of 2023, inflation remains well above the Bank of England’s 2% target. We expect interest rates to remain unchanged for a prolonged period, with the potential for rate cuts in the second half of 2024.
Japan Could Exit Negative Rates
After more than a decade of unprecedented monetary policy easing, the Bank of Japan is seeing signs of higher wages boosting inflation. With the bank’s own recent forecasts indicating sustained inflation, we expect the bank to exit its in the later part of the first half of 2024. We caution that the pace of further rate changes may be slow as the bank will likely take wider financial market implications into consideration.
Negative Interest Rate Policy
In this unusual policy, central banks charge a fee to commercial banks to hold funds rather than pay interest as normal. This may incentive commercial banks to use those funds instead to provide more loans, stimulating the economy.
Main Point
This Year, Interest Rates Should Pivot
We see interest rates falling this year as inflation and central banks relent. Central banks likely will want to feel sufficiently sure that they’ve won the inflation fight before they start to cut their policy rates. So we expect them to wait until around mid-year.
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