Interest Rates in 2024-2025: Scenario Analysis and Crucial Decisions for Investors

Outlook Panorama: Divided Expectations by Region

The interest rate forecast for the coming months remains a fragmented scenario that will depend almost exclusively on how inflation evolves. While analysts in May 2024 projected the first downward adjustment at different times for each region, the reality is that no advanced economy will follow exactly the schedule that experts outlined weeks ago.

In the United States, the Federal Reserve maintains its rate at 5.50%, a level not seen in the last 15 years. The most recent IMF projections suggest that the federal funds rate could peak at 5.40% before starting much later cuts than many investors expected. Optimists talk about gradual declines to 3.75% by the end of 2024, but only if core inflation resumes its downward trajectory. The Fed itself estimated a median of 4.60% for December in March, within a range of 3.90% to 5.40%.

Meanwhile, the European Central Bank faces a dilemma: core inflation is already at 2.9%, closer to the 2% target, but recent concerns about rebounds could force it to keep rates elevated for longer. Some analysts forecast reductions to 4.25% in the second half, although there is consensus on possible modest adjustments of just 25 basis points in the third quarter.

In the United Kingdom, the outlook is more cautious. The Bank of England maintains its rates at 5.25%, but two of its nine members voted in favor of a cut in May. Markets bet on stabilization until summer followed by gradual reductions to 4.75% by year-end. The NIESR forecasts only two cuts of 0.25% in 2024 due to concerns over persistent inflation and wage growth.

Japan represents the most peculiar case after raising its target rate to 0.10% in March 2024, its first significant move after years of negative rates. However, authorities emphasize caution and commitment to loose monetary policy, suggesting limited adjustments or stagnation for some time.

Inflation as a Central Determinant

The key to understanding the interest rate forecast 2024 lies in analyzing what happened with prices in recent years. Between June 2022 and October of that year, the United States experienced an overall inflation of 9.1%, while the European Union and the UK reached historic highs of 10.6% and 11.1%, respectively. This inflation tsunami was the result of a toxic cocktail of factors.

In 2020, the global pandemic abruptly halted economic activity for weeks and months. Governments and central banks responded with colossal injections of fiscal and monetary money, but this enormous liquidity flow eventually generated tremendous inflationary pressures in advanced, emerging, and developing economies.

Simultaneously, global supply chains collapsed, creating shortages just as demand was reactivating. By the end of 2020, almost all raw materials began their upward trajectory. In 2022, Russia’s invasion of Ukraine added another severe inflation shock. Months later, at the end of 2023, the conflict in the Middle East worsened the situation, threatening critical trade routes.

Central banks responded by aggressively raising interest rates. In the US, core inflation remains at 3.8%, nearly double the 2% target. Although price increases have slowed, they remain persistent. The UK faces a greater challenge with 4.2% core inflation. The European Union has achieved greater success, approaching 2.9%. Japan, which had been dealing with recurrent deflation since the mid-'90s, reached 2.6%.

Dynamics of Economic Growth and Employment

Beyond inflation, GDP growth and labor health strongly influence the interest rate forecast. In the US, the economy remains notably solid with an annualized growth of 4.9% in the first quarter of 2024, although it has recently slowed to 1.6%. Unemployment has remained below 4.0% for two years, reaching pre-pandemic levels. This strength suggests that the Fed should be cautious with premature cuts that could excessively stimulate an already active economy.

The European Union presents the opposite: zero growth in the third and fourth quarters of 2023, with unemployment stable around 6.5%. This economic weakness facilitates inflation reduction and opens the door for rate cuts before the US, boosting economic recovery without conflicting with price stability objectives.

The UK has experienced economic contraction since the fourth quarter of 2022, with unemployment rising to 4.3%, above the pre-pandemic 3.9%. This adverse context forces monetary authorities to wait for clear positive signals on inflation before easing.

Horizons 2025: Probable Scenarios

By 2025, if there are no drastic changes in inflation trajectory, numerous interest rate adjustments are expected. The Fed projects an average of 3.60% for December 2025, within a range of 2.40%-5.40%. The European Union could average 3.3% annually, decreasing from 4.50% at the start of the year to around 2.00% in November-December. The Bank of England expects stabilization between 3.00%-3.40%. Japan presents greater uncertainty; observing the impact of the recent increase on the yen will be crucial.

Opportunities and Investment in an Uncertain Context

With US indices (S&P 500, Dow Jones, NASDAQ 100) at all-time highs and high interest rates, markets anticipate cuts during 2024. Corporate results, such as Nvidia surpassing expectations (revenue of 26.04 billion vs. 24.53 billion expected), support potential upward continuation.

Profitable strategies:

The Forex market offers maximum opportunities due to divergences in monetary policy. If the ECB and Bank of England reduce rates before the Fed, EURUSD and GBPUSD pairs will show interesting movements. The USDJPY pair, already appreciated 5.3% since March after the Bank of Japan’s increase, demonstrates this dynamic.

Public and private fixed income (will generate significant capital gains once rates begin a sustained decline. Even without declines, it will provide recurring cash flows valued in high-inflation periods.

Real estate, depressed by high borrowing costs, could recover. REITs offer passive income through dividends.

Technology and cryptocurrencies )Bitcoin, Ethereum( correlated with tech stocks could benefit from cuts, though with higher risk.

Material risks:

All the interest rate forecast depends on inflation decreasing. If it does not happen, markets will abandon the narrative of cuts, producing significant corrections. The US presidential elections in November could bring harmful changes: Donald Trump pushes for immediate cuts and even changes in the Fed’s direction.

Historically, interest rates oscillate in decades-long cycles. Between 1940-1980, they trended upward; from 1980-2020, they continuously declined. Assuming an indefinite continuation of cheap money policies without limits is naive. Markets will surprise those clinging to obvious narratives.

The central recommendation is to maintain strategic flexibility. Regardless of how interest rates evolve, there will always be opportunities for attentive investors who avoid prejudices about future directions.