According to Zhitong Finance, interest rate cuts are set to become one of the most important themes in global markets in 2024.

 After implementing the most aggressive tightening policies in decades during 2022 and 2023, major central banks worldwide are preparing to begin easing monetary policies as inflation continues to fall. Bloomberg Economics' comprehensive measure of global interest rates shows that rates have fallen by 128 basis points over the past year, led by emerging economies, with Brazil, the Czech Republic and other central banks already beginning to cut rates.

The Federal Reserve will lead the policy shift among developed economies. Last month, the Fed released a dot plot showing a 75 basis point rate cut this year, exceeding market expectations at the time. The European Central Bank and the Bank of England are not yet willing to signal rate cuts, but markets expect the ECB to cut rates for the first time in June, with the BoE also expected to follow in June. The Bank of Japan, still implementing an ultra-loose monetary policy, is expected to eventually exit its negative interest rate policy and shift toward tightening.

Bloomberg Economics' Chief Economist Tom Orlik said: "As inflation falls back to target levels and tightening policies only have a modest impact on economic growth, major central banks are looking forward to victory. However, the reality is that monetary policy has little to do with post-pandemic price pressures, and cannot bear too much responsibility in the process of price declines. One conclusion is that the scope of central bank tools is narrow, while the sources of inflation risk are broad."

The plan for rate cuts depends on a sustained slowdown in inflation. Skeptics warn that inflation is still some distance from central bank targets and policies need to remain tight. Nevertheless, overall and core inflation data continue to cool, with commodity prices leading the decline and service prices expected to follow closely, allowing officials to begin taking measures to alleviate the burden of borrowing costs on households and businesses.

The following is Bloomberg Economics' outlook for major central banks worldwide:

1. Group of Seven (G7)

The Federal Reserve

The federal funds rate is currently in the range of 5.25%–5.50%. Bloomberg Economics predicts that the upper limit of this range will drop to 4.25% by the end of this year, meaning the Fed is expected to cut rates by 125 basis points in total. Traders tend to favor the Fed delivering six 25 basis point cuts this year, with the first cut likely in May.

Most Fed officials expect to cut rates this year in response to declining inflation. But they have also emphasized that the Fed's actions depend on further price developments and will be guided by data.

The dot plot released last month showed policymakers expect a 75 basis point rate cut in 2024. Fed Chair Powell and his colleagues stressed that the Fed will act with caution, indicating they are not in a hurry to take action. Powell stated at last month's press conference that it is too early to declare victory, but acknowledged that the Federal Open Market Committee (FOMC) has discussed when to begin easing policy.

Economist Anna Wong said: "The Fed has reached the end of its rate hike cycle. According to key indicators, the core inflation rate is expected to approach the Fed's 2% target by March, and the FOMC may respond to the slowdown in economic growth and rising unemployment by cutting rates for the first time. We expect the Fed to cut rates by another 100 basis points in the remaining time, bringing the upper limit of the federal funds rate to 4.25% by end-2024."

The European Central Bank

The Eurozone deposit facility rate is currently at 4.00%. Bloomberg Economics expects it to fall to 3.25% by the end of this year. Traders see a 50% chance of a 25 basis point cut in March, but are almost unanimous that the ECB will cut rates by 150 basis points this year.

In stark contrast to the Fed, ECB officials remain reluctant to discuss rate cuts. Although Eurozone inflation has fallen far beyond expectations, wage growth remains a concern and it is unlikely to be certain whether this trend is cooling before Q2 2024.

At a time when the Eurozone economy may face its first recession since the pandemic, ECB governing council members have refused to support any imminent rate cuts, contradicting market bets that the central bank will cut rates in coming months. 

The key question now is whether the Eurozone will experience a mild recession that can still be considered a soft landing, or whether the sustained chain reaction of the ECB's unprecedented rate hikes will trigger a severe enough recession to change monetary policy prematurely.

Economist David Powell said: "The ECB has ended raising rates. Potential inflation is declining, surveys show significant deterioration in economic activity, and credit expansion is weaker than during the worst period of the Euro crisis. Unless the economy is in a severe recession, the ECB still needs time to determine if inflation is on the right track. We expect the first ECB rate cut to be in June, but risks are severe and we tend to act early."

The Bank of Japan

The Bank of Japan (BOJ) is the only major central bank globally still maintaining a negative interest rate policy, with a policy rate of -0.10%. Bloomberg Economics expects the rate to rise to 0% by the end of this year.

For BOJ observers, the crucial question is when — not whether — the bank will end its negative interest rate policy. BOJ Governor Kazuo Ueda successfully granted flexibility to the yield curve control (YCC) policy in his first year to cope with sudden increases in yields. The BOJ will analyze a series of data to assess the stability of inflation trends.

The earthquake that struck Japan on New Year's Day caused some economists who expected the BOJ to raise rates to postpone their forecasts. The consensus view is that the BOJ will raise rates in April. The preliminary results of the spring wage negotiations (Shunto) in March are expected to be highly anticipated, as the BOJ has clearly stated this is one of the key factors for achieving a virtuous cycle of wage inflation.

Economist Taro Kimura said: "The BOJ has increased its communication efforts to prepare for the eventual exit from YCC and negative rate policies. But the BOJ is not in a hurry, as wage and inflation data have not sent clear signals convincing the bank that the 2% inflation target can be sustained. We expect the BOJ to transition to the new framework in the second half of this year, most likely in July."

The Bank of England

The Bank of England's (BoE) current benchmark interest rate is 5.25%, and Bloomberg Economics predicts it will reach 4.00% by the end of this year. Markets firmly believe the BoE will cut rates by 25 basis points five times this year, with the first cut possibly in June. Traders have also increased bets on a cut as early as May, despite BoE Governor Bailey insisting it is too early to consider a policy shift.

Speculation is growing that the BoE will be forced to abandon its "higher-for-longer" stance emphasized at last month's policy meeting. The BoE may lower its inflation expectations at its February meeting, as UK inflation in November was much lower than expected.

Although the UK may experience a mild recession in the second half of 2023, its growth prospects are starting to brighten. The BoE's new forecast may reflect market expectations of lower borrowing costs, slower inflation and real wage growth. The BoE will also release its annual assessment of the medium-term growth potential of the economy in February.

Economist Dan Hanson said: "In recent months, the UK's inflation outlook has significantly improved. We believe UK CPI will fall below the BoE's 2% target in spring, providing ample room for the central bank to begin easing monetary policy. The first rate cut may be in May, and by end-2024 the rate will drop to 4.00%."

Bank of Canada

Canada's current overnight rate is 5.00%, and Bloomberg Economics predicts it will reach 4.00% by the end of this year. Traders' expectations for Bank of Canada (BoC) rate cuts in 2024 range from 100 to 125 basis points, with confidence in the first cut priced in for June.

Although BoC Governor Tiff Macklem has repeatedly signaled it is too early to discuss rate cuts, analysts and the market expect the BoC to begin cutting before Q2. The BoC kept rates unchanged for the third consecutive time last month, acknowledging economic stagnation but leaving the door open for further hikes to prevent core inflation underperformance.
With rates at their highest level in 20 years, how highly indebted Canadian households can continue to manage remains a key consideration. Canada's shorter-term mortgage rate resets are faster than in the U.S., which economists believe is why the economy is more sensitive to interest rates.

However, Macklem may not be as inclined to declare victory as his American counterparts. At the start of 2023, the BoC paused rate hikes to assess their impact, which prompted the market to immediately price in rate cuts and led to a resurgence of inflationary housing activity. This time, the BoC does not want to risk repeating the same mistake.

At last month's policy meeting, the six-member Board of Governors increasingly agreed that rates are "sufficiently restrictive" to achieve the 2% inflation target, indicating the central bank's focus is shifting from "how high" to "how long." The BoC stated that before considering a rate cut, it needs to see clearer evidence that underlying price pressures will continue to ease.

Economist Stuart Paul said: "As the labor market cools with broader economic activity, households and businesses will continue to feel pressure from rising prices and interest rates. Although BoC Governor Tiff Macklem has hinted that a policy shift is imminent, we expect rate cuts to begin only in the second half of this year, after data shows the 'last mile' toward the 2% target can be achieved."

2. BRICS Countries

Bloomberg Economics predicts the People's Bank of China (PBOC) will moderately lower interest rates and bank reserve requirements. Economist David Qu said the Chinese economy needs more policy support and the central bank is prepared to continue providing it. "We expect the PBOC to resume rate cuts and lower RRR in Q1. The first rate cut may come as early as mid-January."

For India, Bloomberg Economics predicts the Reserve Bank of India (RBI) will cut rates by 100 basis points this year. RBI Governor Shaktikanta Das stated he hopes to see inflation stabilize around the 4% target in the long term before considering rate adjustments. However, forecasts indicate India's inflation rate will not remain at this level for long until 2024, and fluctuations in food prices may drive up inflation. The RBI's focus has now shifted to ensuring food price pressures do not spread to other sectors.

Since August last year, Brazil's central bank has lowered borrowing costs by two percentage points. Most analysts believe this easing cycle will continue until mid-2024. Led by Governor Roberto Campos Neto, the board has pledged to continue cutting rates by 50 basis points until March. Bloomberg Economics expects Brazil's central bank to cut rates by 275 basis points by end-2024. Brazil's overall inflation has slowed to within the central bank's tolerance range, and closely watched core inflation is also slowing. However, the bank still chose a gradual easing cycle, as most analysts believe inflation will remain above the 3% target by 2026.

Russia's central bank has more than doubled its key rate to 16% in 2023. Bank of Russia Governor Elvira Nabiullina stated last month that the tightening cycle may be coming to an end. But she warned that "key rates will remain high for as long as possible until we determine a stable downward trend in price growth and inflation expectations." Bloomberg Economics expects Russia's central bank to cut rates by 400 basis points by end-2024. Economists say policymakers are still working hard to address inflation, focusing on avoiding premature easing.

Bloomberg Economics expects South Africa's central bank to hold rates unchanged at its two Q1 meetings. Although price growth will slow down by end-2023, inflation risk remains the biggest concern for South African Reserve Bank (SARB) officials. Bloomberg Economics expects only a 25 basis point cut by end-2024. SARB Governor Lesetja Kganyago stated the bank will continue to assess risks to the inflation outlook and is ready to take action to ensure inflation returns to the midpoint of the 3%–6% target range.

3. Emerging Markets

Among major inflation-targeting central banks in Latin America, the Bank of Mexico is the only one that has not yet acted, while many others have begun cutting rates. However, Bank of Mexico Governor Victoria Rodríguez stated a rate cut may come in Q1. The bank expects inflation will not fall back to the 3% target before Q2 2025, meaning any easing will be gradual. Bloomberg Economics expects Bank of Mexico to cut rates by 175 basis points by end-2024.

Despite rapid and large-scale measures taken by Indonesia's central bank to initiate the post-pandemic tightening cycle, it is expected to be more cautious when shifting toward easing. Bank Indonesia (BI) Governor Perry Warjiyo stated the bank will not follow the Fed's footsteps, adding it will have a clearer assessment of rate cuts in H2 2024. Indonesia's inflation risks mainly include supply chain disruptions, dry weather and sustained market fluctuations that may weaken the rupiah and push up import costs for commodities like oil and rice. Bloomberg Economics expects Bank Indonesia to cut rates by 125 basis points by end-2024.

Bloomberg Economics expects Türkiye's central bank to raise rates one last time in January to end its aggressive tightening cycle. Analysts overall expect the benchmark rate to reach 45% (currently 42.5%). Economists predict Türkiye's central bank will maintain this level until Q3, and will further tighten monetary policy through alternative tools such as bank supervision. However, Türkiye's local elections in March may still prompt the central bank to begin the easing cycle earlier than expected, as President Erdoğan tends to seek election support by providing cheap funds.

4. Other Central Banks

The Bank of Korea (BOK) is refuting speculation that it may follow the Fed's signal to adjust monetary policy earlier than expected. However, BOK Governor Rhee Chang-yong stated the bank now has greater room to develop its own path based on domestic conditions, and the "last mile" of fighting inflation may be difficult. Bloomberg Economics expects BOK to cut rates by 50 basis points by end-2024.

The Reserve Bank of Australia's (RBA) tightening policy is nearing its end, with current borrowing costs at a 12-year high. RBA Governor Michele Bullock, who has consistently maintained a hawkish stance, is not expected to easily shift toward easing like other developed economy central bank governors. At the same time, only a few economists believe the RBA may need to hike again at the beginning of this year if inflation proves stubborn. Bloomberg Economics expects RBA to cut rates by 75 basis points by end-2024.