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Market Pulse – BoE to meet its inflation target?

In this edition of Market Pulse, we look ahead to this Wednesday’s Bank of England inflation data and the central bank finally reaching its 2% inflation target for the first time in almost three years. Plus, 

The focus this week: Great British rate cuts

This week could shed some light on where Britain’s interest rates are headed and when. The latest inflation figures will be released on Wednesday, and the Bank of England will deliver its interest rate announcement the next day.

That inflation data is expected to be good. Economists (including those at the BoE) expect the overall pace of price gains to have fallen in May to 2% – taking it to the central bank’s target for the first time since July 2021. The problem is, that it’s not expected to stay at those low levels. The BoE predicts inflation will accelerate in the second half of 2024, to reach an average of around 2.5%. What’s more, there have been some worrying signals in recent inflation updates. April’s round of numbers showed the country’s annual inflation rate was still higher than expected, though it did slow to 2.3% for the overall measure and to 3.9% for the core measure, which excludes the prices of more volatile stuff like food and energy. 

So it makes sense if the central bank seems wary about chipping away at the high interest rates that it’s been using to slow the country’s speedy inflation. And that also explains why traders see virtually no chance that the Bank will lower rates this week from their current 16-year high. But that doesn’t mean the calculation is easy: economic data last week showed Britain’s economic recovery had ground to a halt in April and that its unemployment rate had unexpectedly risen to a 30-month high. Put differently, the UK economy is demonstrating a growing need for the kind of boost that comes from lower interest rates. That’s why traders expect the central bank to lower rates in September, and again in December.

In the calendar 

 

  • Monday: China industrial production and retail sales (May).

 

  • Tuesday: US retail sales (May), US industrial production (May).
  • Wednesday: Japan trade balance (May), UK inflation (May).
  • Thursday: China’s central bank one-year loan rate announcement, Bank of England interest rate announcement, eurozone consumer confidence (June). Earnings: Accenture.
  • Friday: Japan inflation (May), UK retail sales (May), global PMIs (June).

What you might’ve missed last week

Global

  • The World Bank lifted its global growth forecast for this year.
  • “Catastrophe bond” issuance reached a record high in the past five months.

US

  • US inflation cooled by more than expected in May.
  • The Federal Reserve (the Fed) kept interest rates unchanged.

UK

  • Britain’s economic recovery ground to a halt in April.
  • Wage growth stayed robust in the three months to April, despite a slowing job market
  • Mortgage arrears reached an almost eight-year high in the first quarter of 2024 

Why it matters

The World Bank boosted its 2024 global growth forecast slightly, bringing it to 2.6%. Most of the improvement stems from its rosier view of the US growth outlook, which it raised by almost a full percentage point to 2.5%. However, the group kept its 2025 global growth estimate steady at 2.7%, and warned that climate change, conflicts in Ukraine and the Middle East, and high debt levels will hurt poorer countries, where most people live.

Forecasters are expecting a rough hurricane season, prompting insurers to protect themselves by issuing more catastrophe bonds – securities that transfer some or all of the risk from natural disasters to investors. Insurers issued 38% more “cat” bonds in the first five months of 2024 compared to the same period last year, hitting a record $11.7 billion. What’s more, the $4 billion issued in May alone represents the greatest volume of bonds ever sold in a single month.

The annual pace of US inflation ticked down slightly last month to 3.3%, defying economist expectations for an unchanged reading. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, fell by slightly more than forecast to 3.4% – a three-year low. While the report offers the Fed some hope that high interest rates are helping to bring inflation down toward its 2% target, officials will probably want to see a further fall before they start cutting borrowing costs.

Speaking of the Fed, the US central bank kept its benchmark interest rate unchanged at a two-decade high for a seventh straight meeting this week. And policymakers signalled that they now expect to cut rates just once this year – not the three times they were forecasting back in March. They now see four cuts in 2025, instead of three. The Fed also upped its inflation forecast slightly for 2024 but kept its economic growth projection unchanged.

As any Brit could tell you, April was unusually rainy in the UK. The month was one of the wettest on record, and that hit the retail and construction sectors so badly that the UK economy completely flatlined. In other words, it saw zero growth in April, and that big slowdown from March’s 0.4% expansion now has folks worrying that the rebound from last year’s recession may have lost all momentum.

Disclaimer

This publication has been produced with Finimize. As with all investing, your capital is at risk. This publication does not contain and should not be taken as containing, investment advice, personal recommendation, or an offer of or solicitation to buy or sell any financial instruments. Prospective investors should seek independent financial, tax, legal and other advice before making an investment decision. 

 

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