With next week’s milestone meetings of both the US Fed and UK’s Bank of England – plus UK inflation data due out on Wednesday – it’ll be a significant week for market watchers and wealth managers.
Ahead of next week’s Bank of England MPC meeting on Thursday, Luke Bartholomew, senior economist, abrdn, said:
“The Bank of England is set to keep interest rates on hold next week. The voting breakdown of policy makers is expected to reveal that the Monetary Policy Committee remains deeply divided about the appropriate course of policy, with at least one member likely to vote for a cut, while others might still prefer to tighten policy.
“This division on the MPC reflects the conflicting signals about the economy now. Underlying growth is very weak, albeit it seems the UK may already have emerged from its recession, with stronger real income growth helping to boost sentiment and activity. Wage growth is slowing, but is still too strong for the Bank’s comfort, and uncertainty around the quality of the unemployment data makes it difficult to assess the true health of the labour market right now. Inflation is set to fall rapidly over the coming months thanks to falling energy prices, but there are big questions about whether it will stay low or start to rise again later this year.
“Given these uncertainties we expect the BoE to wait until at least June before delivering the first interest rate cut as it waits for a stronger signal from the data, and for the impact of the April price and wage round to become clearer. Once cuts start, we expect interest rates to fall somewhat more than what the market is anticipating as persistently low growth and poor supply potential should pull UK policy rates lower over time.”
And ahead of the FOMC meeting also taking place next week, James McCann, deputy chief economist, abrdn, said:
“The Fed is concerned that the last mile of its inflation fight might prove to be an uphill slog, and CPI data this year will have only added to these fears.
“Against this backdrop the central bank will deliver a cautious message to markets, acknowledging the progress they have made in lowering inflation, but warning that they need to see a further slowdown to justify lower interest rates.
“The good news is that despite setbacks in early 2024 inflation should soften as we move through the first half of the year, setting up a first cut from the Fed in June. Indeed, we expect the FOMC to continue to signal three cuts this year in its updated interest rate forecasts next week, which would be consistent with this timeline. However, Chair Powell will make it clear that further disappointments on the inflation front would mean that rates need to stay higher-for-longer.”
