Central bank governors on both sides of the Atlantic are facing pressure from multiple sources (politicians, financial markets, public opinion) to lower interest rates. All central banks are facing the same issue, regardless of the economic situation or the current level of policy interest rates.

Multiple arguments have been cited to urge central banks to lower interest rates. Inflation has been steadily falling towards the target of 2% - although doubts have been raised about this progress due to lagging core indicators. Concerns about a recession persist - although the upcoming data does not indicate a warning sign. A survey by the European Commission shows that the US economy continues to create significant employment opportunities every month - even though growth is slowing down, and economic expectations in the Eurozone are not far from the long-term average.

The sudden market crash in the first week of August frightened market observers - although it was ultimately proven to be a random event: the benchmark S&P 500 index in the US increased in the following month. So, what better reasons do central banks have to significantly cut interest rates?

Now, as the September policy meetings approach, central banks around the world should think twice and reconsider the prospects for interest rates. One key point to be aware of is that they are not all starting from the same line.

For the Federal Reserve, there are compelling reasons to cut interest rates. The benchmark federal funds rate is at a 23-year high of 5.25% to 5.5%, about 3% higher than the current reading of its preferred inflation gauge. With inflation moderating and the labor market landing softly, a 25 basis point rate cut would send an encouraging signal while maintaining the necessary restrictive stance for completing the disinflation process. A 50 basis point cut might be a stretch, but it still meets the criteria. Federal Reserve Chairman Powell stated in his August speech at Jackson Hole that the time has come for interest rate cuts and said, 'the direction is clear.' As the US summer comes to a close, this view continues to hold.

The inflation indicators for the Bank of England are close to those of the Federal Reserve, with consumer inflation rates slightly closer to the 2% target, but expected to rebound. The difference here is that the Bank of England already cut interest rates before the summer - which was a controversial decision at the time, with its chief economist, Huw Pill, voting against it. The reasons for the Bank of England to cut interest rates again are not as strong as in July, nor as strong as the current Federal Reserve.

The situation for the European Central Bank is completely different. Not only did it cut interest rates before the summer, but, more importantly, its policy rate is at 3.75%, 1.5 percentage points lower than its counterparts across the ocean. This is a consequence of rate policies from 2014 to 2019, when the ECB experimented with negative rates and maintained them for about a year after inflation began to rise. This action plan means that the ECB currently has less room to relax its policy compared to other central banks.

It should be noted that the central bank's monetary policy stance depends on the level of interest rates, not on changes. The latest reading of the overall inflation rate in the euro area in August was 2.2%, which is 0.4 percentage points lower than in July. This latest data is not as reassuring as it seems. The core inflation rate remains unchanged at 2.8%. The sticky component of the index, which accounts for nearly half of it - service sector inflation, has risen from 4% to 4.2%. The overall decline in inflation in August is entirely dependent on the significant easing of energy prices, but it may not be stable. This is an encouraging sign for the future, rather than a decisive indication for immediate action.

The European Central Bank needs to maintain a moderate restrictive stance to further promote anti-inflation. As its chief economist, Philip Lane, said at Jackson Hole, "The path to the target is still unclear." For this reason, it is necessary to maintain the actual short-term interest rate at the current level, which is about 1.5%. If the nominal interest rate is subtracted from the core inflation rate, the actual short-term interest rate will be even lower. The European Central Bank is expected to maintain this level in September.

European Central Bank President Lagarde has often expressed that the central bank she leads does not follow the Federal Reserve but formulates its own course because these two economies are different. She is right, and the September meeting this year is an opportunity to put this statement into practice.

This article is from Ignazio Angeloni, former member of the supervisory board of the European Central Bank, senior researcher at Bocconi University and Leibniz Institute for Financial Research (SAFE).