THE ECONOMIC PERISCOPE - DECEMBER 2023

THE ECONOMIC PERISCOPE - DECEMBER 2023

Wednesday, December 27 2023

Decline in the inflation rate in US is strengthening the expectation of easing its monetary policy more quickly than expected. In November’2023, the CPI inflation has further reduced to 3.1% compared to 3.2% in October 2023. Core inflation remains around 4%.The biggest driver of the decline was a fall in energy and gasoline prices, followed by lower travel costs and hotel rates. As far as monetary policy is concerned, there is low probability to expect the first rate cut before June 2024. Before the Fed cuts interest rates permanently, it will probably ensure that core inflation declines sustainably and that the labour market continues to weaken. Due to the time lag in the impact of its monetary policy, it would normally have to act well before inflation reaches 2%. The market expects a rate cut of 25 basis points (bps) per meeting from June to December 2024, followed by a cut every other meeting until 2025. This would mean that the target range for the key interest rate would be 3.00% to 3.25% by the end of 2025. However, some experts have highlighted: “The Fed is likely on hold until we get more credibly toward 2.0% core inflation, and then it could start signalling a gradual reduction of interest rates to get to a less restrictive policy stance.”

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