• Despite progress on inflation in the US, expectations for a rate cut in March look overly optimistic.
  • Economic growth in the UK continues to hover near zero.
  • Government support likely needed to help revive China’s economy.


Investors may need to temper their expectations for interest-rate cuts by central banks, despite pockets of progress in bringing down inflation.

While the steady decrease in the pace of inflation around the world in recent months has been encouraging for central-bank policymakers, there is a risk of an upswing should tensions in the Middle East escalate. This could push up inflation again through higher goods prices, as well as through the potential for disruption to energy supplies.

Vanguard foresees central banks in developed markets cutting interest rates in 2024, although only in the second half of the year. We believe that market expectations for earlier cuts don’t acknowledge the challenges of bringing inflation that last mile down to their 2% targets, given stickier wage-related services inflation. The risk of any new rise in goods prices could give central banks something else to consider.

United States

Core inflation in the US, which excludes volatile food and energy prices, is nearing its 2% target, according to the measure preferred1 by the Federal Reserve (Fed), the US central bank. However, core inflation as measured by the broader Consumer Price Index (CPI) remained materially above the Fed’s target in December, at 3.90% in the 12 months to December. 

Despite the progress on inflation, we believe market expectations for a Fed rate cut in March are overly optimistic. We expect it will be the middle of 2024 before the Fed is confident that it has reined in inflation enough to start cutting interest rates. 

For now, the labour market appears healthy. The US economy added a greater-than-expected 216,000 jobs in December. The unemployment rate was unchanged at 3.7%. 

The US economy grew at an annualised2 rate of 4.9% in the third quarter, according to the final estimate by the Bureau of Economic Analysis.

Euro area

Data suggest that the euro area economy contracted slightly in the fourth quarter and we continue to expect that a recession will be mild. 

Markets expect the European Central Bank (ECB) to cut rates by a total of 1.4 percentage points, beginning in the second quarter. However, we think that rate cuts will total only 0.75 percentage points and won’t begin until the middle of the year. The central bank is navigating a narrow path between the risks of inflation and recession and could change course if conditions change. 

The ECB left interest rates unchanged at 4% in December, warning that although the pace of inflation had decreased in recent months, it was likely to pick up temporarily in the near term. Headline inflation, which includes volatile prices such as energy, jumped to 2.9% in the 12 months to December, up from 2.4% in the year to November. The increase was broadly in line with expectations and was driven by the phasing out of household energy support. 

However, the pace of core inflation, which excludes volatile food, energy, alcohol and tobacco prices, continued to slow in the 12 months to December, to 3.4% compared with 3.6% in the 12 months to November. 

United Kingdom

As in the euro area, economic growth in the UK continues to hover near zero. After modest growth in the first half of 2023, the UK economy contracted by 0.1% in the third quarter. Preliminary data suggest the economy stagnated or contracted minimally in the fourth quarter, in line with our outlook for a mild recession. 

For all of 2024, we foresee below-trend economic growth in a range of 0.5%–1%. As inflation falls, however, we expect economic activity to receive a modest boost from gains in real wage growth.

We continue to anticipate fewer and later Bank of England (BoE) rate cuts than the markets do. We expect interest-rate cuts totalling 1 percentage point in 2024, beginning in the middle of the year at the earliest. This compares with market expectations for cuts of 1.2 percentage points beginning in May or June. In maintaining the bank rate at 5.25% for a third straight meeting in December, the BoE said the risks were still skewed towards higher-than-expected inflation.

Headline inflation, measured by the Consumer Prices Index (CPI), climbed by 4.0% in the 12 months to December, slightly higher than the 3.9% pace in the 12 months to November. It was the first time the pace had increased since February 2023. In the services sector, where inflation is especially sticky, prices rose by 6.4% in the 12 months to December, higher than the 6.3% in the 12 months to November.


China’s economy grew by 5.2% in 2023, surpassing the government’s target for growth of “around 5%”. The comparison was to a particularly low base, as major cities spent an extended period under Covid-19-related lockdowns in 2022. 

Consumer prices fell for a third straight month in December, down by 0.3% in the 12 months to December. We expect the economy to climb out of deflationary territory (when prices are falling) over the course of 2024, with headline inflation in a range of 1.5%–2% and core inflation of 1%–1.5%. 

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 18 January 2024. 


1 The Personal Consumption Expenditures (PCE) index.

2 An annualised growth rate is the pace of growth that would be achieved over a year if the rate of growth in a particular quarter was maintained over the whole period. 

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