The likely end of interest rate hikes but not of monetary restraint

The rate hikes cycle is coming to an end. The further weakening of economic activity and lower inflation that we expect to see by the end of this year should prompt the Fed, like the ECB and the BoE, to stop raising their policy rates. However, a further tightening cannot be ruled out. Interest rate hikes would not be followed immediately by cuts: to continue the fight against inflation, monetary response is expected to hold policy rates at their current high level for an extended period, until mid-2024 according to our forecasts. The first rate cuts would then occur to accompany the sharper fall in inflation and offset its positive impact on real policy rates. From this point of view, monetary policy would remain restrictive until the end of 2024.

In September 2023, out of a sample of some 40 central banks, only around ten raised their policy rates, including the ECB. After the global tightening movement that began at the end of 2021, such a move is now more of an exception than a rule (see Chart 1). The ECB raised its policy rates instead of leaving them unchanged as we expected, standing out above all from the US Federal Reserve (Fed) and the Bank of England (BoE) which opted for the status quo in September (Fed funds range maintained at 5.25-5.50% and BoE bank rate unchanged at 5.25%). This decision was expected for the Fed, but not for the BoE. It was certainly not in line with our scenario, and the vote was very tight with four out of ten committee members in favour of a 25 bp increase to 5.5%.

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