Will the Federal Reserve signal a pause in interest rate cuts?

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The Federal Reserve is widely expected to cut US interest rates by a quarter point on Wednesday, with a steady inflation reading for November helping to strengthen those bets.

Futures markets are pricing in a 95 per cent probability the central bank will make a 0.25 percentage point reduction to the fed funds rate at the end of its final two-day meeting of the year. That would take the Fed’s target range for interest rates down to a range of 4.25-4.5 per cent.

Expectations were reinforced after figures from the Bureau of Labor Statistics this week showed that US inflation edged up to 2.7 per cent in November, higher than 2.6 per cent in October but in line with economists’ consensus forecasts.

Labour market data earlier this month also showed that the US economy added 227,000 jobs last month — more than expected — after October’s tally was knocked sharply by hurricanes and strike action.

Investors and strategists are now focusing on the outlook for 2025, with lingering inflation and a resilient jobs market casting a doubt on a cut by the Fed early in the new year. “They may go on hold [after December],” said Brian Levitt, global market strategist at Invesco, following the latest inflation report.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, noted that Donald Trump would also be inaugurated as US president before the next Fed meeting on January 29.

“Such a sequence of events bodes well for the Fed taking a break from cuts to reflect and assess any official policy changes from Trump,” he told clients. Harriet Clarfelt

Will the Bank of Japan raise interest rates?

For most of November the market was increasingly confident that the Bank of Japan would use the final monetary policy meeting of 2024 to raise its policy rate by a quarter point and continue governor Kazuo Ueda’s stop-start push towards “normalisation”.

Analysts said there were positive signals from the economy, the downward pressure on the yen remained strong and inflation appeared to be moving in line with the central bank’s outlook.

Some investors were even bracing for a repeat of the extreme volatility in equities that followed the BoJ’s surprise rate rise in July.

But this week economists at a range of big investment banks told clients to expect the BoJ to keep rates on hold: not because the economic signals had changed but because the politics had.

Since Prime Minister Shigeru Ishiba’s disastrous bet on a snap election, the Liberal Democratic party has been forced to navigate a hung parliament and rely on a smaller opposition party, the Democratic Party for the People, to pass a supplementary budget. The DPP has expressed resistance to further rate increases until March, arguing that it should wait until the spring “shunto” wage negotiations show indisputably that this year’s solid increases were not an anomaly.

“We still believe the stance of the Ishiba administration could be the most important point in determining the timing of the next rate hike,” said Naohiko Baba, an economist at Barclays in Japan. He added that ahead of next summer’s upper house election, the administration appeared to be seeking higher approval ratings through fiscal expansion. Leo Lewis

Will the Bank of England offer hints on future rate cuts?

Investors will be watching the Bank of England’s policy meeting on Thursday for clues on the outlook for UK interest rates early next year.

The central bank is widely expected to hold the benchmark lending rate steady at 4.75 per cent. With no press conference or economic outlook to accompany the decision, investors will be focused on the bank’s guidance and the vote split.

Most economists expect that eight of the nine Monetary Policy Committee members will vote to keep rates unchanged. Most analysts also expect the central elements of the BoE’s communication on the future rate path to remain the same, including the “gradual approach to removing policy restraint” and policy needing to remain “restrictive for sufficiently long”.

However, the labour market data published on Tuesday and November’s inflation data published on Wednesday “could shift the vote split and guidance”, said Jack Meaning, an economist at Barclays.

“There is a minor possibility that the vote could be as much as 3-6,” said Meaning. “Were this to happen, it would be a significant dovish signal from the committee.”

Meaning also expects some paragraphs to be added to the guidance “to differentiate the divergent views in the majority bloc”. He also said that the committee would probably acknowledge some economic trends, such as the impact of increased national insurance contributions, will probably dissipate over the first few months of 2025.

Sanjay Raja, an economist at Deutsche Bank, expects CPI annual inflation to accelerate to 2.5 per cent in November, from 2.3 per cent in October, with services inflation edging up higher to 5 per cent.

“Following on from the October data, we have seen some increase in price pressures, particularly around core goods, food and energy,” he said.

Raja added that the rise in national insurance contributions and the national living wage, “will probably start to add to services momentum at the start of 2025”. Valentina Romei