Officials from three of the world’s major central banks have signaled that they are poised to lower interest rates in the coming months, marking the start of a shift away from the high borrowing costs that have defined the post-Covid economy. As global inflation wanes, central banks are beginning to focus more on emerging economic weaknesses, particularly in labour markets.
Federal Reserve Chair Jerome Powell, speaking at the annual economic symposium in Jackson Hole, Wyoming, suggested that the U.S. central bank is likely to reduce rates when officials meet in September. Powell emphasized that the Fed’s future actions will be guided by incoming data, the evolving economic outlook, and the balance of risks, with a growing emphasis on labour market conditions over inflation.
Similarly, several members of the European Central Bank’s (ECB) Governing Council, including Finland’s Olli Rehn and Portugal’s Mario Centeno, signaled support for additional rate cuts in the eurozone, following a significant reduction in June. Rehn noted that the disinflation process in Europe is “on track,” but warned of subdued growth in the region, particularly in manufacturing, which strengthens the case for a rate cut in September. The ECB officials appeared to be coalescing around the idea of two more cuts this year, contingent on inflation trends.
Bank of England Governor Andrew Bailey also indicated an openness to further rate cuts, citing diminishing risks of persistent inflation. The UK central bank recently lowered its benchmark lending rate to 5%, its first reduction since the pandemic began.
Beyond Europe and the U.S., central banks in Canada, New Zealand, and China are also easing rates, while Japan remains an outlier, having initiated its first tightening cycle in 17 years.
Despite the consensus on the direction of interest rate policy, Powell and his counterparts offered little clarity on the pace of future cuts, underscoring the uncertainty that still clouds the global economic outlook. Powell did, however, express strong support for the labour market, noting the recent rise in the U.S. unemployment rate to a nearly three-year high of 4.3%. He emphasized the Fed’s commitment to maintaining a strong labour market while progressing toward price stability.
Research presented at the Jackson Hole conference warned that the U.S. labour market is nearing a tipping point, with the risk that additional economic slowing could lead to a more significant increase in unemployment. Atlanta Fed President Raphael Bostic echoed these concerns, suggesting that if unemployment spikes, the Fed may need to act more aggressively.
