UBS stated that central banks around the world have begun a rate-cutting cycle, which could ultimately lead to global interest rates being lower than expected. Despite recent inflation data being quite noisy, the ongoing global deflationary trend has been overlooked.
In a report released on Wednesday, UBS highlighted that the endpoint of the rate-cutting cycle might be lower than anticipated. While the mid-term outlook shows that interest rates will remain positive during the cycle, in the long term, rates could be "much lower than currently expected."
Several central banks, including the European Central Bank, the Bank of Canada, the Swiss National Bank, and the Czech National Bank, have already initiated rate cuts. UBS expects the Federal Reserve to begin cutting rates in September, as "the latest data on inflation, growth, and the labor market will justify the first rate cut in September."
In the United States, the market is expecting interest rates to drop to around 4%, but UBS noted that this is far below the Federal Reserve's long-term benchmark rate forecast of 2.75%, leaving ample room for the market to adjust its rate-cutting expectations.
UBS added, “We believe the market will start to anticipate lower long-term interest rate levels.”
Some central banks, including the Federal Reserve, consider a stable inflation rate of around 2% and closely monitor this path to identify clues for future rate cuts.
