Mortgage Interest Rate Expectations – Financial Markets v Central Banks

The market has begun to interpret the reducing inflation levels to mean central banks can begin to cut interest rates. In the US, there is an expectation that interest rates will peak at around 4.9%. In the eurozone, the equivalent number is about 3.5%.

The opening days of February saw the US Fed increase interest rates by 0.25%, while the ECB and Bank of England raised rates by 0.5%. The US Fed Chairman indicated at his February press conference that the “disinflation process has started” indicating that the increased interest rates were having the desired effect.

What’s noteworthy is that the market now expects the US Fed to start cutting interest rates in the second half of the year (and by something like 0.5%) and there’s a small possibility of the ECB doing likewise late in the year. However, Central banks disagree.

Despite the recognition of progress on inflation, the US Fed continues to push back against lowering rates too soon, indicating that more increases will be needed to reach 2% inflation levels.

To judge by the comments from ECB President in which she has overtly stated the market has it wrong, there remains considerable tension between how the market views EU interest rates and how the ECB view the matter.

Source: Bloomberg 01.02.23 (post Fed & pre ECB announcement).

Warning: Past performance is not a reliable guide to future performance