THINK Ahead: The case for rate cuts

Opinions Opinion by James Smith THINK Ahead: The case for rate cuts 13:59 United States Nobody talks about rate cuts these days. That was so 2025! But James Smith argues they could be back on the agenda sooner than markets think – and the Federal Reserve could end up easing policy next year.

All that, plus our guide to the week ahead Mention “rate cuts” at your own risk The case for rate cuts The term “rate cut” is effectively banished in central bank circles right now. Rumour has it that any mention of The Policy Change That Must Not Be Named at the European Central Bank gets you turned into a frog. Or worse, sent for mandatory training at the German Bundesbank, where someone lectures you about the “1970s” for several hours… Best not mention it at the Fed either.

New Chair Kevin Warsh might launch yet another taskforce, adding to the five he launched this week. Wednesday’s meeting was a wake-up call for anyone who still thought Warsh would immediately vote to cut ra… I mean, recalibrate policy lower. And a reminder that Warsh is just one of 12 voters – and quite a few of the other 11 now see the case for hikes this year.

Investors think the only way is up. Rates are priced 50bp higher in the US a year from now. The eurozone and UK are seen not far behind.

Markets aren't looking for rates to come down before 2028 Source: Macrobond, ING "> Source: Macrobond, ING This is where we disagree. Yes, the ECB may well hike again this summer. But the bigger story is that across the US, Europe and Britain, we think rates are more likely to be lower, not higher, in 12–18 months’ time.

Take the US. The Fed’s rapid shift rests on three arguments: a jobs market rebound despite lower immigration, inflation at 4% and above target for five years, and a growing sense that policy may not be especially restrictive after all. But there are holes in each of those arguments.

The jobs market recovery looks less impressive when you exclude private health/social care and hospitality. Those sectors account for only a quarter of jobs, but two thirds of jobs growth so far this year. Yes, hiring has improved elsewhere, but not nearly as rapidly as the headline figures imply.

And crucially, there’s very little sign that this improvement is feeding into broader wage pressure. The rebound in US jobs isn't quite as strong as you think Source: Macrobond, ING "> Source: Macrobond, ING That’s one reason why inflation fears should start to recede as the year goes on. Another is housing.

Kevin Warsh himself acknowledged this week that policy still looks restrictive when you look at what’s happening there. And as James Knightley argues in his excellent piece today , rents are barely rising – something that should increasingly pull core CPI lower given housing’s huge weight in the index. Add lower fuel prices, a reversal of recent air fare spikes and the fading impact of tariffs and the case for rate hikes looks much less compelling.

Europe in many ways looks similar. ECB policymakers are increasingly talking tough about “second-round effects”. Christine Lagarde said this week she’s beginning to see signs of them.

Message received: the ECB wants to hike again this summer. But is it actually happening? Food inflation fell sharply in May, not just in the eurozone, but in the UK and in parts of Eastern Europe, too.

If you were looking for early signs that something was happening to inflation away from the obvious fuel-intensive categories, this would be an obvious place to find them. Admittedly it’s still very early days and, contrary to Lagarde’s comments, much too early to conclude anything about second round effects. But by next winter we should have a decent sense.

Carsten Brzeski reminded me this week that January matters a lot because that’s when we start to see lots of annual price resets coming through. And by the first quarter of next year, we should have a much clearer sense of whether energy costs are feeding into pay negotiations and stickier inflation categories. And if they aren’t?

Then today’s “insurance” hikes (another banned phrase!) may start to look unnecessary. Policymakers could start to conclude that insurance is no longer worth paying for. For those of us in the UK, we’ve seen this movie before.

Almost exactly a year ago, Bank of England hawks were sounding the alarm about rising food prices, rising employer taxes and a jump in the minimum wage. Policy easing was slowed down. Yet by February, those fears had largely evaporated.

The doves declared victory, BoE analysis concluded the risk of second round effects had faded. And the latest data on prices and wages bears that out. Absent the Iran war, there was a growing case for getting a move on with… you know what .

That may prove a useful guide for what happens elsewhere over the next year. Which brings us back to markets. Right now, investors think rates are heading - and staying - higher.

We suspect that by this time next year, central banks will be quietly preparing to explain why they’re going lower. And if I’m wrong, then don't be surprised if this column just becomes me, the banished frog, croaking away beside a Frankfurt pond… THINK Ahead in developed markets United States (James Knightley) Market rate hike expectations jumped on the hawkish pivot from the Federal Reserve. We recognise that the Fed has missed its inflation target for the past five years and Kevin Warsh wants to bring this to an end.

Nonetheless, the inflation backdrop should improve markedly over the next 12 months and questions remain over how robust the jobs market actually is. Significantly, half the FOMC don't think the Fed needs to hike, and we agree with them. A lengthy pause is our call.

May Core PCE (Thu): Next week we are likely to hear from a few Fed officials, despite Warsh stating that the Fed talks too much. In terms of the data, the highlight will be the personal income and spending report. Retail sales were decent and that should be reflected in good consumer spending numbers, but with incomes lagging, we may see a further drop in the savings rate.

We are getting close to all-time lows, which hints at stress for many consumers. Meanwhile, the Fed’s favoured measure of inflation, the core PCE deflator, is expected to come in at around 0.3% month-on-month based on CPI and PPI metrics already released. We suggest the balance of risks signal a 0.2% outcome would be more likely than a 0.4% print.

Eurozone (Bert Colijn) Jun Consumer Confidence (Mon): For the eurozone, all eyes will be on confidence indicators next week. With consumer confidence out on Monday, we’ll get a sense of how the prolonged uncertainty around the Middle East situation and higher inflation is playing out in June. Don’t expect the deal to be fully included in the numbers yet, so this may understate sentiment, perhaps.

Jun PMI (Tue): For the PMI, the concern for May was that data came in rather downbeat. The question is whether June has seen some recovery already, or whether growth concerns are increasing. With growth around the zero line, a technical recession is never far away for the eurozone.

The PMI will give more insights into whether the energy crisis has had a more negative economic impact again in June. THINK Ahead in Central and Eastern Europe Hungary (Peter Virovacz) Rate Decision (Tue): An intriguing rate decision by the National Bank of Hungary is approaching. Official communication has suggested a cautious rate cut in June, meaning a 25bp move down to 6.00%.

However, given that the forint has reached a five-year high against major currencies, government bond yields have fallen to levels not seen since early 2022 and the risk premium on German Bunds has dropped to the lowest percentile of historical spreads, a bolder move is warranted. Nevertheless, until we hear decision-makers openly discussing the option of cutting rates by 50bp, we pencil in a 25bp move. In our view, an outsized cut would be easily justified based on market pricing and for economic structural reasons, especially if the US-Iran deal remains in place until the rate decision is announced.

Czech Republic (David Havrlant) Jun Confidence (Wed): Both business and consumer sentiment are likely to record a marginal improvement in June on the back of the recent Hormuz negotiations and reduced tension, which imply lower oil prices. Domestic fuel prices eased tangibly in June, which should contribute to a halt in the deterioration of consumer sentiment. Hopes for a more sustainable resolution of the conflict will be supportive of business sentiment when it comes to future expectations.

CIS (Dmitry Dolgin) Rate Decision (Wed): We expect the Central Bank of Azerbaijan to hold the refinancing rate at 6.50% at the upcoming meeting on 24 June. Compared to the previous meeting, the inflation rate picked up slightly to 5.8% YoY, with increased pressure seen in all the major segments – food, non-food, and services. Meanwhile, with inflation still within the upper bound of the 4±2% target range and the balance of inflationary risks largely unchanged, there should be little urgency to adjust the monetary policy stance.

Key events in developed markets next week Source: Refinitiv, ING "> Source: Refinitiv, ING Key events in Central and Eastern Europe next week Source: Refinitiv, ING "> Source: Refinitiv, ING Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion The case for rate cuts THINK Ahead in developed markets THINK Ahead in Central and Eastern Europe Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England.

He graduated from the University of Bath with a degree in economics and joined ING in 2015.