Nomura expects Fed, ECB, BoE rate cuts next year

Nomura expects major developed market central banks to start cutting interest rates next year as inflation eases and expected recessions linger, with peak rates expected to be hit this year.

The Japanese bank's economists expect the US Federal Reserve rate hikes to peak at 3.50-3.75% in February next year, despite an expected recession starting in the fourth quarter.

They then expect the Fed to pause until core inflation slows to 2-2.5% annually, then cut rates by 25 basis-points per meeting from September 2023. Balance sheet run-off will also end then to avoid policy tools working against each other, they expect.

At the European Central Bank, Nomura expects six increases to raise rates by 175 basis points by March 2023. But as an expected recession drags on, they expect a 25 basis-point rate cut to follow in June.

If Germany were cut off from Russian gas completely, the ECB's policy tightening could end earlier than projected, they added.

At the Bank of England, Nomura expects another 100 bps of rate hikes by year-end. It added that an expected recession dragging on and inflation slowing meant 25 basis-point rate cuts in May and June 2023 were likely.

"That's an extra cut relative to our ECB view because the BoE will have raised rates further and the BoE thinks UK inflation will ultimately undershoot its target," they wrote.

Money markets are also pricing in rates falling at the Fed and Bank of England next year. ,