March 2024
Market Commentary
Summer rate cuts expected
(3 min read)
Rhetoric from the Federal Reserve and the Bank of England following monetary policy meetings this week has been softer in tone regarding the fight against inflation and the consequent outlook for interest rates. Markets are discounting three quarter point cuts in rates in the US by the end of this year and two in the UK, both from levels of 5.25%.
Inflation in the developed world has fallen sharply from the high levels seen eighteen months ago, closer to the 2% target levels, as extreme price increases fall out of the year-on-year comparisons and is expected to fall below 2% in the UK later this year. This phase of slaying the inflation dragon was always going to be the toughest. Core inflation in the UK fell to 4.5% in February, the lowest since January 2022, but it averaged 2% between 1997 until 2024. See attached chart.
Core UK Inflation
The Bank of England’s Monetary Policy Committee (MPC) voted 8 to keep policy unchanged with 1 member voting for a cut. This is an important change from the last meeting when 7 voted for unchanged versus 2 wanting an increase in rates. The sense is that policy makers seem more confident in achieving their targets and view 4%+ base rates, 2% above inflation, as a more appropriate level. While we believe that we have seen the peak in rates for this cycle, and consequently we have increased portfolio exposure to fixed income, the risk that inflation remains stubborn continues.
While goods inflation is falling, services prices are continuing to rise. The US economy remains robust and here in the UK the data is improving. Meanwhile global equity markets have so far this year taken the reduced pace of interest rate cuts in their stride, but this may be more to do with the phenomenal strides being made in sectors such as AI and the strength of corporate balance sheets than the impact of the higher cost of funding for businesses and consumers.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
21st March 2024
