UK Budget: Key details
30 Oct 2024
19 September 2024
Julien Lafargue, Chief Market Strategist, Barclays Private Bank
Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as of 19 September 2024. Past performance is never a guarantee of future performance.
In a hotly anticipated turn of events, the US Federal Reserve (Fed) – the world’s most influential central bank – has voted to trim its benchmark interest rate by 50 basis points (bp).
It’s the first rate cut in the US for 4 years and takes the Fed’s target range to 4.75-5%.
Prior to the decision, there had been uncertainty and debate about whether the Fed would take baby steps with an initial 25bp cut. In the end, it went big with a move that’s been labelled as a ‘jumbo cut’, heralding the start of a new era for monetary policy.
Meanwhile, voting members of the Bank of England’s (BoE) Monetary Policy Committee (MPC) voted 8-1 in favour of keeping the UK base rate on hold at 5%. After implementing an initial cut in August, it was words rather than actions that spoke loudest this month - the BoE confirmed its intention to start cutting again from November onwards, if current trends persist.
Both the UK and US outcomes were widely expected and already priced in by markets. The clear statements of intent from the Fed and BoE will be welcome news for investors, who much prefer clarity over uncertainty.
In the UK, Wednesday’s data release had shown headline inflation remaining steady at 2.2%, very slightly above the BoE’s 2% target. A small, above-consensus uplift was recorded in services inflation, which moved from 5.2% in July to 5.6% in August, but it was attributed to a seasonal rise in airfares (rather than anything significant or structural).
All in all, the data trends make a strong case for future cuts. This was confirmed by the MPC’s meeting minutes: “For most members, in the absence of material developments, a gradual approach to removing policy restraint would be warranted1.”
In the US meanwhile, expectations are rising that a ‘soft landing’ is on the cards for the world’s number one economy. It would be a significant achievement for the Fed which has faced stern criticism from some quarters, mainly around its speed to react and its clarity of messaging.
The shared challenge of central banks now is to cut rates at a pace and scale that don’t stoke the inflation embers. On the flip side, those cuts need to be sufficient and supportive enough to minimise recession risk.
In the aftermath of the pandemic, soaring and stubborn inflation has left an ugly footprint on economies and households around the world. In response, monetary policy has been the (blunt) weapon-of-choice, and there is finally a consensus emerging that it has done the job.
For now, caution remains the name of the game. In the words of BoE governor Andrew Bailey: “It's vital that inflation stays low, so we need to be careful not to cut too fast or by too much2."
Looking ahead, markets are currently pricing in more cuts in key economies before the end of 2024. That trend is expected to continue in 2025.
The end of an historic and painful inflation struggle appears to be upon us.
Please note: Our final Market Perspectives report of 2024 releases in October, and our ‘Outlook 2025’ report will be out in mid-November.
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Bank of England, ‘Monetary Policy Summary, September 2024’, 19 September 2024Return to reference
Andrew Bailey, Bank of England post-MPC press conference, 19 September 2024Return to reference