Interest Rates: Divergence on the Horizon

U.S. and European interest rates have been on similar paths, but analysts predict a divergence. While the Fed may ease rates modestly, the ECB is expected to cut aggressively. Economic conditions differ, with U.S. growth strong and euro-zone inflation below target, influencing future rate settings.

This year, U.S. and European interest rates have moved in tandem, even though their economic and inflationary outlooks differ vastly. Markets expect this trend to persist, but experts believe they are wrong.

The Federal Reserve, Bank of England, and European Central Bank are forecasted to ease rates similarly by the end of 2025, yet economic indicators point to diverging paths. The U.S. shows robust growth, while euro-zone inflation lags the ECB's targets.

Nomura's European economists predict the ECB may slash rates aggressively next year. Across the Channel, Britain's fundamentals are more robust, but rate cuts akin to those in the U.S. are still expected. This divergence could affect the dollar's strength and the euro zone's economic landscape.

(With inputs from agencies.)