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Policymakers want to make sure the inflation monster is really dead.
If you’ve been waiting for interest rates to drop, it’s probably going to take more time than you expected.
Heading into 2024, several countries have decided to leave their benchmark rates where they are. Even when they say cuts are coming, they want to make sure that inflation is well and truly under control first.
For example, at its Jan. 31 meeting, the US Federal Reserve decided to keep the federal funds rate around 5.25% to 5.5%, where it has been since July 2023.
“Inflation has eased from its highs without a significant increase in unemployment,” Fed Chair Jerome Powell said. “That is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain. I want to assure the American people that we are fully committed to returning inflation to our 2 percent goal.”
The European Central Bank also kept rates unchanged at its meeting in late January. While acknowledging that inflation has continued to recede, the ECB said that it planned to keep rates “at sufficiently restrictive levels for as long as necessary.”
The Bank of England also decided to hold steady in January. As did the Bank of Canada, but its discussion has shifted from whether it needs to raise interest rates to when a cut would make sense.
To be fair, it’s not unreasonable to expect cuts at some point. In December, the Fed predicted it would reduce interest rates at least three times in 2024.
Meanwhile, inflation — the main driver behind the recent run of rate hikes — has eased considerably since 2022. The euro zone, for example, recorded year-over-year inflation of 2.9% in December while the European Union saw a YoY increase of 3.4%. Those were very close to its target rate of 2%, which could theoretically allow policymakers to start reducing interest rates.
That expectation has helped drive the stock market higher and higher in recent months. And that makes sense: Lower interest rates could spur more economic growth by reducing the cost of borrowing, which in turn would allow businesses to expand and consumers to purchase big-ticket items such as homes and vehicles.
Instead, policymakers have steadily pushed back against the idea that cuts will be coming rapidly. Reducing interest rates too quickly or too deeply could reignite inflation. Central bankers have no desire to cut rates and then be forced to raise them again a few months later. Nor do they want inflation to settle above the 2% target that most nations operate under.
Central bankers may also be mindful of recent reversals in inflation. In December, for example, inflation hit a four-month high in India because of higher food and fuel costs. The US and Canada also experienced upticks in inflation.
It’s entirely possible that unexpected trends could interfere, but right now, policymakers are generally open to the idea of rate cuts sometime this year. They’re no longer talking about the potential need to raise rates further. Instead, they’re explaining what needs to happen for rates to be reduced.
And maybe it’s just tough talk, but if those policymakers can be believed, then cuts are unlikely in the first quarter. Late spring may be the earliest that rates begin to roll back — assuming that inflation trends continue moving the right way.
In the meantime, businesses still need to access working capital for operations and investments in growth. C2FO’s Early Pay solution is one of the most effective ways for small and midsize companies to increase their cash flow. By granting their customers a small, competitive discount, they can receive payment on their outstanding invoices weeks or even months early. That injection of cash can give companies the resources they need to meet critical challenges. Discover how C2FO’s early payment solutions work and how they could benefit your company.
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