Rate cuts have preoccupied financial markets since the start of this year. Inching towards June and the first central bank is yet to blink. The US Federal Reserve had, until very recently, been expected to take the lead. A series of stronger US CPI readings in the first quarter, largely revolving around the stickiness of core services inflation, seems to have put paid to those expectations. The April CPI figure wasn’t as bad as feared but ‘shelter inflation’, known more universally as housing rental costs is still persistently high. Now Europe has pushed forward as the more likely first contender, with June cuts being pencilled in.
Implied number of cuts from central banks - N.B Assuming uniform 0.25% cuts. Blank months represent no meeting
Source: Bloomberg and Columbia Threadneedle Investments, as of 24 May 2024
The European Central Bank (ECB) has a head start over the Bank of England (BoE), if June is indeed to be the month of the first cuts. The ECB meets on 6 June while the BoE’s next big meeting is 20 June. In the UK, wage inflation has been the main obstacle to an easing.
At its most recent meeting, the BoE’s Monetary Policy Committee (MPC) said that in the decision on rates they would “consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.” They also stated that “the Committee noted that this year’s pay settlements, which tended to be concentrated in the early part of the year, would provide an important indication of the extent to which pay growth continued to moderate as expected.”
Ahead of the next meeting, the MPC will get one more inflation and labour market report. In the case of the latter, the impact of a rise in the National Living Wage, of 9.8% in April, will have at least partially fed through. In any case, a survey released on 13 May by the Chartered Institute of Personnel and Development, of 2,009 employers contacted between 26 March and 18 April, said employers expected median pay settlements in the private sector, for the coming 12 months, to be unchanged at 4%, while expectations in the public sector remained at 3%. Consumer price inflation slowed to 2.3% in April after a reduction in regulated energy prices but services inflation was stronger than expected. Services inflation is likely to ease throughout 2024 as wage growth gradually slows.
UK April inflation
Source: The Bank of England Monetary Policy Committee and Bloomberg. 22 May 2024
Data watch takes on new urgency
The outlook for UK inflation was sufficiently benign for two members of the rate setting committee, Swati Dhingra and Dave Ramsden, to vote for a rate cut. That is only one more than last time but still another half step towards a rate cut. The inflation slowdown is likely to be more gradual and the MPC cannot be as confident in the outlook given the stickiness in services, but the trend is downward.
The Office for National Statistics (ONS) labour market report on 14 May showed wages, excluding bonuses, grew by 6.0% in the first three months of 2024 compared with the same period a year earlier. Elsewhere in the ONS report, there were some signs that Britain’s labour market was cooling. The unemployment rate rose to 4.3%, its highest since the three months to July 2023 and vacancies fell for the 22nd time in a row in the three months to April.
Positioning for the rates pivot
US rates are only 25bps higher than the UK, but US GDP is growing at 3% and has been for the past year. Growth has been much stronger in the US than in the UK and Eurozone but this could be changing. The UK economy has recovered the ground lost in last year’s mild recession and should stay positive as consumer confidence improves and spending increases in line with rising real incomes. Core inflation is now lower in the Eurozone and the gap with the UK is closing fast. We think that the US economy is slowing as the consumer retrenches. That in turn should put US inflation back on a downward path.
Central bank rates
Source: Macrobond, as of 15 May 2024
Slower growth, tighter credit and falling inflation should give central banks confidence that policy is sufficiently restrictive. We think that there is a reasonable chance that the data will allow the Federal Reserve to cut in September, but the prospects are clearer in the UK for an August move and the Eurozone looks a done deal for June. Within our Universal funds we maintain an overweight position to US bonds.
