Fed, ECB To Decide On Rates, AI Shares Recover Lost Ground
The Federal Reserve (Fed) and the European Central Bank (ECB) will decide on matters of monetary policy today and tomorrow respectively. While the Fed’s board will likely refrain from cutting interest rates this time, ECB’s policymakers seem to be willing to reduce the central bank’s borrowing costs to boost economic growth.
AI shares recovered some of the ground lost on Monday after the rollout of Chinese startup DeepSeek’s R1 reasoning model. In other news, the Bank of Canada (BoC) will announce its own rate decision later in the afternoon.
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Fed Rate Decision
The Federal Open Market Committee (FOMC) is expected to announce its interest rate decision later in the evening. Economists suggest that the Fed’s policymakers won’t alter borrowing costs after the upcoming board meeting. On January 29th, the CME FedWatch Tool gave only a 0.5% probability for a rate reduction.
It’s no secret that the Fed monitors Donald Trump’s first steps as US President, including his rhetoric regarding imposing tariffs on imported products coming from countries such as Mexico, Canada and the EU.
Economists at ING noted that “after 100bp of rate cuts the Fed has signaled it needs evidence of economic weakness and more subdued inflation prints to justify further policy loosening. President Trump’s low tax, light-touch regulation policies should be good news for growth, while immigration controls and trade tariffs provide upside risk for prices, suggesting we could have a long wait for the next cut.”
ECB Rate Decision
On Thursday, it will be the ECB’s turn to have its monetary policy meeting. Market analysts forecast that the ECB’s governing council will proceed with a 25 basis points interest rate cut. The reason behind the cut is, as they say, to boost the eurozone’s economy that seems to be struggling especially in a time that potential US tariffs could slow down the bloc’s economic growth even more.
Goldman Sachs economists suggest that the ECB could move forward with one more 25 basis points after the March meeting. Their forecast sees the benchmark interest rate reaching 1.75% in July. A Euronews report quotes Bank of America economists seeing rates even lower to 1.5% in summer. However, the consensus among economists is that inflation volatility would play a role after March so upside inflation risks due to energy costs should be taken into consideration.
Australian CPI Inflation Drops In Q4 2024
According to a report by the Australian Bureau of Statistics (ABS), headline inflation in the country rose 0.2% in the fourth quarter, under forecasts of a 0.3% increase.
On an annualised basis, CPI inflation dropped to 2.4%, from 2.8% the previous quarter, below the market consensus of 2.5% and remaining in the central bank’s target range of 2-3%.
Australian Treasurer Jim Chalmers said that "the worst of the inflation challenge is well and truly behind us. The soft landing we have been planning and preparing for is looking more and more likely.” The lower inflation figures brought forward a potential rate cut by the Reserve Bank of Australia, forcing the Australian dollar to weaken on Wednesday morning.
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