February 2024
Market Commentary
Don't bank on big interest rate cuts
(3 min read)
Yesterday, 20th February, Andrew Bailey was in front of the Treasury Select Committee and the headline in the financial media was that the Bank of England (BoE) does not have to wait for the inflation rate to hit the 2% target before cutting interest rates. In the same breath the Governor said that the economic outlook for the UK was brighter than the recent data suggests which put the economy into a mild recession in the second half of 2023. We think he was correct to paint a more optimistic picture and this view is backed up by today’s fiscal report showing that the budget surplus for January was the biggest on record - a boost for Jeremy Hunt ahead of next month’s budget. An improved budget position results from stronger tax receipts because of firmer economic growth.
The Bank of England were ‘behind the curve’ in raising interest rates, certainly versus the US Federal Reserve, at the start of the cycle nearly two years ago. The BoE risks creating uncertainty around future inflation expectations if it cuts rates too early, particularly if growth is improving which is the view of Barclays CEO, C.S. Venkatakrishnan, who said during his company’s update “we’re very, very bullish on the UK as a place to do business and as a place from which to do business”.
In the US, markets have pulled back from pricing in seven interest rate cuts starting in March to three beginning in May. The year-to-date rally in markets has been driven by the prospect of easier policy and led by ‘growth’ stocks although it is encouraging that equity markets have held up well as rate cut expectations have been reduced. The US economic data remains robust, significantly outperforming the consensus and, while the headline has fallen closer to target, the core rate of inflation remains sticky. Bloomberg News yesterday had an article debating whether the next move in interest rates could be up, quoting Larry Summer the ex-US Treasury secretary. His view is that the Federal Reserve could make the same mistake as they did in 1998 when it cut rates too early on the back of the Russian and LTCM crises only to reverse course because of inflationary pressure. This view is far from consensus but not beyond the realms of possibility. The implications for markets would be significant: negative for many areas of the growth and technology sectors but relatively positive for defensive areas of the market.
We have discussed at length in previous newsletters the importance of diversification in portfolios and the swing in macro-economic views gives us greater conviction that portfolios are well positioned for multiple scenarios and outturns.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
21st February 2024
