Bank of England’s Greene: rate cuts in the UK should still be a way off
A Bank of England policymaker says UK interest rate cuts should be ‘a way off’, a blow to borrowers hoping for cheaper credit soon.
Megan Greene, an external member of the Bank’s monetary policy committee, argues that there is a greater threat of inflation persistence in the UK than in the US (where we know prices are rising faster than expected).
And she fears that market pricing for UK interest rates does not reflect this persistence.
Writing in the Financial Times this morning, after yesterday’s US inflation shock, Greene says the UK economy has faced a “double whammy” of a very tight labour market and a terms of trade shock from energy prices.
Green writes that macroeconomic fundamentals and inflation dynamics differ in the UK and US, and that the markets aren’t fully reflecting this:
She explains:
There has been encouraging news on UK wage growth and services inflation in recent months. The risk of inflation persistence is diminishing as these indicators come down in line with the MPC’s forecast. But they remain higher than in other advanced economies, particularly the US.
Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well.
Traders have cut their forecasts for UK interest rate cut this year, after Wednesday’s US inflation data. They expect at least just two quarter-point cuts this year.
UK Bank rate is now seen falling to around 4.75% by the end of 2023, down from 5.25% today, having previously been expected to drop to 4.5% by December.
Key events
After a volatile day yesterday, the London stock market has opened calmly.
The FTSE 100 has gained just 0.06%, or 5 points, to 7965, inching slightly closer to the alltime high of 8,047 set in February 2023.
DIY firm Kingfisher (+4.3%) is the top riser after a broker upgrade.
While Western policymakers fret about inflation, China is struggling with weak price growth.
Chinese consumer prices rose by just 0.1% year-on-year in March, weaker than forecast, and a sharp drop on the 0.7% infllation recorded in February.
On a monthly basis, prices fell by 0.1% during last month.
Such weak price growth will fuel concerns over the strength of China’s domestic demand, a day after credit rating agency Fitch cut its outlook on China’s debts, and warned of “uncertain economic prospects”.
In contrast to the US, China’s March headline and core CPI was much weaker than expected. Core CPI fell back to 0.6% yoy from 1.2%!
The US has stoked demand and inflation with fiscal stimulus but China has fiscal issues too, causing a Fitch downgrade.https://t.co/yUGIDvJjXx pic.twitter.com/3Mkwn8aZdR
— Albert Edwards (@albertedwards99) April 11, 2024
UK seen cutting rates earlier than the US
The latest money market pricing shows that the first cut in UK interest rates is fully priced in by August.
That’s earlier than for the US. After yesterday’s US inflation report, financial markets pushed back their expectations for the first rate cut to September from June, according to CME’s FedWatch Tool.
That’s concerning Megan Greene, who argued in her piece today that “the markets are moving rate cut bets in the wrong direction:.
Megan Greene is also concerned that wages are rising faster in the UK than in the US – creating an increased risk of persistent inflation.
Higher inflation expectations have translated into higher pay growth, by some metrics now between 6-7 per cent in the UK versus 4-5.5 per cent in the US. Such sticky wage growth is a significant component of services inflation.
It will need to slow further to see services inflation return sustainably to target-consistent levels. This last mile may prove the hardest. UK services inflation remains much higher than in the US.
Yesterday’s hotter-than-expected US inflation report spooked Wall Street, sending the Dow Jones industrial average down by 1.1%, and the broader S&P 500 index 0.95% lower.
Asian markets have followed suit; MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, while Japan’s Nikkei shed 0.45%.
With the dollar strengthening, the yen slumped to its lowest level against the greenback since 1990, at 153.24 yen to the $.
Bank of England’s Greene: rate cuts in the UK should still be a way off
A Bank of England policymaker says UK interest rate cuts should be ‘a way off’, a blow to borrowers hoping for cheaper credit soon.
Megan Greene, an external member of the Bank’s monetary policy committee, argues that there is a greater threat of inflation persistence in the UK than in the US (where we know prices are rising faster than expected).
And she fears that market pricing for UK interest rates does not reflect this persistence.
Writing in the Financial Times this morning, after yesterday’s US inflation shock, Greene says the UK economy has faced a “double whammy” of a very tight labour market and a terms of trade shock from energy prices.
Green writes that macroeconomic fundamentals and inflation dynamics differ in the UK and US, and that the markets aren’t fully reflecting this:
She explains:
There has been encouraging news on UK wage growth and services inflation in recent months. The risk of inflation persistence is diminishing as these indicators come down in line with the MPC’s forecast. But they remain higher than in other advanced economies, particularly the US.
Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well.
Traders have cut their forecasts for UK interest rate cut this year, after Wednesday’s US inflation data. They expect at least just two quarter-point cuts this year.
UK Bank rate is now seen falling to around 4.75% by the end of 2023, down from 5.25% today, having previously been expected to drop to 4.5% by December.
Introduction: Markets slash bets on rate cuts after US inflation rises to 3.5%
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Investors are growing nervous that central banks will not cut interest rates as soon as they had hoped this year, with inflation remaining suprisingly sticky.
Traders have slashed their bets on Federal Reserve interest rate cuts after US inflation rose by more than expected in March.
They now expect just one or two cuts to US interest rates (which are currently 5.25%-5.5% range) this year, down from three earlier this week – and six at the start of the year.
Yesterday’s CPI data showed US prices rose by 3.5% per year in March, higher than expected, up from 3.2% in February.
The report will be a big disappointment for the Federal Reserve, says Matthew Weller, global head of research at FOREX.com and City Index, addding:
Traders are souring on the potential for a June rate cut from the Fed, with the September/November timeframe now looking more likely.
CME FedWatch Tool – Target Rate Probabilities For 12 JUN 2024 FED Meeting
One day ago, the probability of a 25bps cut in June was at 56.1%.
As of the inflation news today, that probability has gone down to 17.9%.
Market is now betting 81.3% that rates stay the same in June. https://t.co/5yRJloQCO1 pic.twitter.com/IKgX7EEbqe
— CRE Debt | Dorian (@CREdebtDorian) April 10, 2024
The data prompted US president Joe Biden to press grocery retailers to lower prices, admitting that “prices are still too high for housing and groceries”.
There’s even some chatter that the Fed’s next move could be another hike, rather than the long-expected cut.
Former Treasury Secretary Lawrence Summers told Bloomberg TV yesterday:
“You have to take seriously the possibility that the next rate move will be upwards rather than downwards.”
Such a likelihood is somewhere in the 15% to 25% range, Summers indicated.
Also coming up today
European monetary policy will be in focus this afternoon, when the European Central Bank sets interest rates for across the eurozone.
The ECB is expected to leave borrowing costs unchanged, but ECB president Christine Lagarde may be pressed about how close her governing council is to cutting interest rates, as eurozone inflation has now dropped to 2.4%
No change in interest rates is anticipated, yet Lagarde will be called upon to clarify what “little more” we have actually learned about inflation and the rate outlook, and whether she will finally hint at a June rate cut.
AstraZeneca shareholders will vote on its CEO’s controversial £1.8m pay rise, which would take Pascal Soriot’s maximum package to £18.7m this year.
The agenda
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7am BST: Norway’s GDP report for February
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9.30am BST: Latest UK economic activity and social change data
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1.15pm BST: European Central Bank interest rate decision
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1.30pm BST: US Producer Price Index (PPI) index
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1.30pm BST: US weekly jobless claims
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1.45pm BST: European Central Bank press conference
