Global central banks will begin loosening monetary policy in 2024 as inflation decelerates, our friends at Mashreq said in their latest 2024 Economic and Markets Outlook report. The cooling inflation figures will encourage central banks to “pause” before beginning to cut interest rates in 1H 2024, as they look to ensure that progress on disinflation is on track. Premature cuts could lead to renewed inflationary pressures, Mashreq notes the European Central Bank said last month.

“Soft landing” on the horizon: With the global economy posting resilient growth last year, Mashreq expects the upward trajectory to be carried over into this year, driven mainly by private consumption activity. Central banks are projected to halt their policy tightening as global headline inflation is projected to cool to 5.8% in 2024 and 4.4% in 2025, Mashreq’s report reads, citing figures from the IMF.

Mashreq suggests that a US recession is unlikely to happen in 2024, as the country continues to register strong economic growth and higher wage growth. The US Federal Reserve is expected to keep implementing disinflationary measures as it eyes “stronger growth,” Mashreq writes, citing Fed Chairman Jerome Powell.

Why does this matter? The UAE’s overnight deposit rate, or the base rate on overnight deposit facilities, is anchored to the US Fed’s interest rates as the AED is pegged to the USD.

ICYMI- The Central Bank of the UAE followed in the Fed’s footsteps to keep interest rates steady this month, maintaining its overnight deposit rate at 5.40% and the overnight lending rate at 5.90%.

With 2024 already fraught with risks, the lender expects the global economy to slow down. From the ongoing Russia-Ukraine war continuing to impact energy and food prices to the Chinese economy stumbling and “[dragging] down global growth,” Mashreq foresees global economic and geopolitical developments threatening to reverse the disinflationary trend, forcing central banks to delay interest rate cuts, impacting capital flows and trade volumes, and disrupting global supply chains.

The bond market is in for a good year: The global bond market is expected to grow in 2024, propelled by cooling global inflation, receding market volatility and central banks easing their restrictive monetary policies.

Appetite for emerging market (EM) bonds is expected to grow on the back of “lower default risk,” with bilateral and multilateral lenders poised to support distressed issuers. EM central banks are expected to ease their interest rates driven by easing domestic financial pressures in tandem with the decelerating inflation.

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