A calm in the storm

Fed and ECB officials signal contrasting near future policy adjustments, with the ECB likely to cut rates in June while the Fed maintains a cautious stance on policy easing.

By Ahmed Azzam | @3zzamous | 18 April 2024

Market close
  • ECB officials suggested a potential rate cut in June, depending on upcoming economic projections.

  • The Fed is likely to maintain its current policy stance longer as the US disinflation process appears to stall.

  • Bank of England's Governor Bailey expects a sharp decrease in inflation soon, highlighting ongoing sectoral disparities.

  • The Bank of Japan plans to adjust interest rates slowly, continuing its ultra-loose monetary policy.

Today’s forex markets saw limited volatility during the Asian and European sessions, with key currency pairs and crosses hovering within the confines of the previous day's fluctuations. The Australian Dollar bucked the trend by edging higher, shrugging off unexpectedly weak employment figures, buoyed instead by a resurgence in Asian equities and a stable risk environment.

Despite a flood of commentary from the Federal Reserve (Fed) and the European Central Bank (ECB), their insights have yet to substantially sway market dynamics. The ECB is poised for a rate decrease in June, consistent with prior signals, while the Fed's stance appears fixed for an extended period amidst a sluggish disinflation process in the U.S., hinting at a potential pause in policy easing.

BoE’s Bailey signals inflation respite

At an International Institute of Finance conference, Bank of England (BoE) Governor Andrew Bailey forecasted a significant drop in upcoming inflation metrics, emphasizing the need for a balanced approach in monetary policy. "While service sector inflation remains elevated at around 6%, the plummet in energy prices, portrays a skewed inflation landscape," Bailey commented, stressing the importance of equilibrium across various sectors.

ECB officials hint at June rate cut

ECB Governing Council members, including Bundesbank President Joachim Nagel and Bank of Portugal Governor Mario Centeno, indicated a rate cut in June is becoming more plausible. "Our upcoming economic projections will be crucial to this decision," Nagel remarked on CNBC, noting persistent high core and service sector inflation as potential caveats. Centeno echoed this sentiment, suggesting a 25 to 50 basis point cut remains likely, though monetary conditions would stay stringent.

Fed's stance cautious as inflation cooldown stalls

Federal Reserve Governor Michelle Bowman highlighted at the same conference a stagnation in inflation progress, hinting that current policy settings might not be constrictive enough. "Financial markets are vibrant, and growth continues unabated, which might suggest our policies aren’t sufficiently restrictive," Bowman stated. Loretta Mester of the Cleveland Fed also called for patience, advocating for more data before any policy shifts.

BoJ’s Noguchi advocates gradual policy shifts

BoJ board member Asahi Noguchi today contrasted Japan’s economic stance with its global counterparts, predicting any interest rate adjustments to be gradual. "Japan’s path to achieving a stable 2% inflation rate will necessitate sustained ultra-loose monetary policies, despite recent significant wage hikes," Noguchi explained.