(Bloomberg) -- Policymakers from London to Frankfurt are signaling limited appetite to follow the US with rapidly cuts in borrowing costs, opening up a new transatlantic divide over the speed of global loosening.
That was the tone set in Europe on Thursday in the wake of the inaugural half-point interest-rate cut of the Federal Reserve’s easing cycle delivered the evening before.
In its own decision, the Bank of England responded with a pledge to adopt only a “gradual approach” to lowering borrowing costs, while a hawkish European Central Bank official insisted on staying “data dependent.” Norwegian policymakers even signaled that any move this year is probably out of the question for now.
While the US step is a form of catch-up with action already taken by its counterparts, the abruptness of its reduction points to a switch in mood music — even as transatlantic policy synchronizes on a single direction.
The Fed is now expected by investors to unleash another 70 basis points of cuts over two meetings scheduled before the end of the year, far quicker than peers in the UK and euro zone who gather on a similar timetable but insist they won’t be rushed.
While that contrast might reflect a greater emphasis on protecting jobs in the US central bank’s mandate, it’s also a reflection of differing backdrops, where the nature of wage-setting in Europe means that officials must stay cautious.
The focus on such threats has shifted “more so in the US than in Europe,” according to James Rossiter, head of global macro strategy at TD Securities in London.
“The inflation box has been ticked in the US now, and the upside risks have rapidly disappeared,” said Rossiter, a former official at the BOE and the Bank of Canada. “That’s allowed the Fed to pivot to growth and labor market data as a primary driver for policy” but “this has not happened yet in Europe.”
The BOE’s decision struck a wary note over future moves after officials left rates unchanged at 5%, in an 8-1 decision. Officials didn’t even directly address the prospect of a cut in November, the moment when investors expect a reduction along with new forecasts.
Such a display of reticence about easing sent the pound to its strongest against the dollar since March 2022, and prompted markets to scale back bets on a shifting to quicker loosening later this year.
What Bloomberg Economics Says...
“Our base case continues to be that the MPC cuts once more this year – in November. We see a quarterly pace being maintained until rates reach 3%.”
—Dan Hanson and Ana Andrade. For their BOE REACT, click here
The UK continues to grapple with the lingering aftershocks from the surge in inflation. Governor Andrew Bailey warned in an interview on Thursday that “services inflation is still elevated” as he rammed home his message of a “gradual path down” for borrowing costs.
The labor market also remains tight with regular wages climbing at over 5% year-on-year and unemployment falling.
“What was striking about today’s BOE decision is how different the messaging was compared to the Federal Reserve yesterday,” said James Smith, developed markets economist at ING.
Earlier, Norway’s central bank kept its deposit rate at a 16-year high of 4.5%, and pushed the likely prospect of reductions out until next year. Officials in Oslo are concerned about inflation pressures threatened by the weakness of the krone, the worst-performing currency in the Group of 10 this year.
ECB Governing Council member Klaas Knot, meanwhile, told an event in Istanbul that he does see room for the ECB to continue easing monetary policy — but only assuming inflation cools as projected. On that basis, the Dutch central bank chief is comfortable with investor bets on further rate cuts.
Markets see one or two additional quarter-point moves by the ECB in 2024, with borrowing costs settling at 2% after six more next year.
Other colleagues have been even more explicit about sticking to a cautious approach. Peter Kazimir of Slovakia said on Monday that the ECB “will almost surely need to wait until December” before its next move.
Delivering a second rate cut at their meeting last week, members determined that they can’t yet rule out a move in October, but that it’s currently unlikely, according to people familiar with the matter.
To be sure, some smaller countries in Europe could step up aid for their economies. Given the strength of the franc, supported by the Fed decision, there’s a risk that Switzerland’s central bank could deliver a half-point cut next week, according to economists.
Similarly Sweden’s Riksbank will almost certainly overtake local peers with its own extent of easing next Wednesday, when forecasters anticipate a third rate reduction.
While Europe’s bigger jurisdictions look likely to lag the Fed for now, some economists reckon that’ll be pretty temporary. Tim Drayson, head of economics at Legal and General Investment Management and a former UK Treasury official, reckons the gap will “close over time.”
“I don’t think the Fed will continue at this pace,” he said. “We’ve had a year of much lower headline inflation, and the wage pressures will come down quite quickly across Europe. So that would justify the ECB and BOE potentially speeding up.”
Events could also knock policymakers off course on both sides of the Atlantic over a crucial autumn period when Kamala Harris and Donald Trump face off for the US presidency, with the prospect that either of them could stoke inflation in due course.
“As we move into next year, it’s going to totally depend on the election,” said David Page, head of macro research at AXA Investment Managers. “Arguably even Harris is going to enact policy that’s a little bit more inflationary, and we think that’s probably going to curtail some of the Fed’s tightening more than it so thinks.”
--With assistance from Ott Ummelas, Patrick Sykes, Cagan Koc, James Hirai and Niclas Rolander.
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