When a tough decision looms, it helps if someone else can make it first and take the blame if it all goes wrong.
It’s a position much of the world’s central banking fraternity have found themselves in.
Almost all raised interest rates to battle inflation, and are now looking for the chance to cut borrowing costs back down again.
The difficulty is working out when.
Luckily, June appears to provide the perfect opportunity. The European Central Bank meets first on June 6, followed by the US Federal Reserve a week later, then the Bank of England shortly after.
It means Andrew Bailey and his colleagues in Threadneedle Street can wait for the Fed – and preferably the ECB too – to act, then follow suit.
But even as the weak eurozone economy appears to be crying out for lower rates, the American juggernaut, pumped up on Joe Biden’s heavy borrowing and spending, thunders on, and thus may require rates to stay higher for longer. Traders in financial markets are now pushing back their predictions for the first US rate cut to July.
Recent US inflation data suggest price rises remain stubbornly high. Headline inflation, as measured by the consumer prices index (CPI), stood at 3.2pc in February, while core inflation, which strips out volatile movements in food and energy, showed prices were 3.8pc higher than a year ago.
The Fed’s preferred measure of inflation, based on the personal consumption expenditures (PCE) index, currently stands at 2.5pc – or 2.8pc excluding food and energy. All measures remain above the central bank’s 2pc target.
Analysis by Goldman Sachs showed housing costs remain a key driver. With costs up 6pc compared with a year ago, this is double the average of the past two decades and well above the rate consistent with the Fed’s 2pc target.
Restaurants and other leisure spending also remain key drivers of inflation, while spending on hotels and furnishings is much softer.
Goldman also highlighted that while energy prices are currently at 138pc of pre-pandemic levels and wage growth remains robust, there are signs that the jobs market is cooling. Goldman believes inflation will be back at the Fed’s 2pc target by next year.
But Pimco, one of the world’s biggest bond investors, said growth in the world’s biggest economy remained “surprisingly strong” and was likely to continue relative to other G7 economies.
“We still expect the Fed to start normalising policy midyear, similar to other developed market central banks. However, the Fed’s subsequent rate-cutting path could be more gradual,” said Pimco’s Tiffany Wilding and Andrew Balls.
“The factors that have contributed to US resilience could continue to support the (still-slowing) economy for a while longer,” they added, outlining five reasons why the US economy was likely to stay strong.
Biden’s spending spree during the pandemic was one major factor, they said. “Still-elevated Federal deficits have bolstered US demand relative to other regions.”
The US deficit in 2023 was $1.7 trillion (£1.35 trillion), or 6.3pc of GDP.
Pimco also described the looming US election as an “inflection point” that nevertheless suggested both candidates would “lean towards policies” that would boost economic growth and borrowing.
The Fed’s decisions have implications for the rest of the world too, partly because its analysis is taken into consideration by other central bankers studying the likely path of inflation. In addition, as the world’s most powerful monetary authority, its interest rates affect borrowing costs across the globe.
Traditionally the Fed has been considered the leader in monetary policy, the assumption being that when it changes interest rates others will follow.
As a result one might assume that a later move from the Fed’s chairman Jerome Powell means Bailey and the ECB, led by Christine Lagarde, might also stay on hold.
But it does not always work out that way. The Bank of England raised interest rates first in December 2021, before the Fed joined the action in March 2022 and well ahead of the ECB which held off until July the same year.
“Recent history shows it is not necessarily true – we have deviated, we were the first to raise rates, so why not cut first?” says Martin Beck, chief economic adviser to the EY Item Club.
“The US economy is really strong on many metrics and we are not, so there is not the same need to restrain activity as there is there.”
However there are still three key reasons Threadneedle Street might pay attention to its US counterpart’s actions: Powell’s analysis of the inflationary pressures facing the economy; the potential impact on the exchange rate; and the effect of on global borrowing costs.
US inflation has been sustained in part because of its tight jobs market. The hot economy created enormous demand for workers, pushing up pay and so driving inflation.
Wages have also provided a headache for the Bank of England, with UK pay still rising at more than 6pc annually.
“The question will be whether there are any similarities in the US experience with the UK, which suggest some risks with cutting rates,” says Rob Wood at Pantheon Macroeconomics.
“In the UK’s case the labour market remains tight, wage growth is stronger than the US, inflation remains higher, at least until the next release, and growth is picking up pretty sharply, according to business surveys.”
The situation in the eurozone is somewhat different. While its jobs market has recovered from the pandemic, at 6.5pc unemployment is still far higher than Britain’s rate of 3.9pc, giving Lagarde and her colleagues fewer worries over a wage-price spiral.
Then comes the exchange rate threat.
Britain has just about overcome a wave of imported inflation from energy prices and international food markets.
If it moves before the Fed, it risks depressing the pound and so pushing up import costs again.
“If you move significantly further and faster than the Fed, you may find you are generating more inflation as sterling falls, which would be pretty inconvenient if you have just gone through a period of battling very high inflation,” says Pantheon’s Wood.
Regardless of the precise timing of the Bank of England’s first rate cut, higher borrowing costs in the US will have an impact on this side of the Atlantic, so even if Britain does lead the charge, the effect risks being distinctly underwhelming.
“It keeps monetary conditions globally tighter than otherwise, because the US is such a dominant player,” says the EY Item Club’s Beck.
“Market rates in the UK would still go down because of the Bank of England cutting, but it would not go down as much because of the gravitational pull of investing in the US, where returns are higher.”
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