abrdn expects interest rates in major developed markets to fall to sub 3% over the next two years but has concerns around recession the risk of which it sees as increased due to three main factors.
Paul Diggle, chief economist at abrdn, said: “We expect the major developed market policy rates to eventually fall below 3% by the end of this cutting cycle in 2026.
“We maintain our call for a soft landing in the US economy, as inflation risks have moderated and rate cuts are underway. However, we are increasingly concerned about recession risks amid a deceleration in activity, particularly in the labour market, consumer spending, and corporate investment.”
He added: We expect the Federal Reserve to continue cutting rates, but in 25bps increments from here, with the Fed funds rate being lowered to 2.825% by early 2026. The European Central Bank and Bank of England will move more slowly than the Fed, given some lingering inflation concerns.”
abrdn’s forecasts also suggest the Bank of Japan will continue raising rates, with the next hike likely in December or January, given strong wage dynamics and the central bank’s desire to return to a more neutral policy stance.
On China, Diggle says, the “recent barrage of stimulus may yet fall short of addressing the structural challenges in its economy. However, this is certainly a game-changer from its previous incremental approach to policy support. This should help to support growth and risk sentiment towards China.
He adds: “Emerging market growth has been holding up reasonably well, and inflation is returning to target levels. We think the easing cycle in emerging markets will broaden as the Fed continues to cut rates, with Brazil an outlier.”
The group’s global economic forecasts, Diggle says, are based on victory for Kamala Harris in the upcoming US presidential election. “However, we think the race is close to 50/50 due to small polling margins and historical polling errors in favour of the Republicans.
“In the UK, the Labour Party conference has ended, and the messaging is that the upcoming budget is likely to involve fiscal tightening, with tax increases to address a substantial shortfall relative to the debt rule.”
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