A Bank of England policymaker says UK interest rate cuts should be ‘a way off’, a blow to borrowers hoping for cheaper credit soon.
Megan Greene, an external member of the Bank’s monetary policy committee, argues that there is a greater threat of inflation persistence in the UK than in the US (where we know prices are rising faster than expected).
And she fears that market pricing for UK interest rates does not reflect this persistence.
Writing in the Financial Times this morning, after yesterday’s US inflation shock, Greene says the UK economy has faced a “double whammy” of a very tight labour market and a terms of trade shock from energy prices.
Green writes that macroeconomic fundamentals and inflation dynamics differ in the UK and US, and that the markets aren’t fully reflecting this.
She explains: "There has been encouraging news on UK wage growth and services inflation in recent months. The risk of inflation persistence is diminishing as these indicators come down in line with the MPC’s forecast. But they remain higher than in other advanced economies, particularly the US.
"Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well."
Traders have cut their forecasts for UK interest rate cut this year, after Wednesday’s US inflation data. They expect at least just two quarter-point cuts this year.
UK Bank rate is now seen falling to about 4.75% by the end of 2023, down from 5.25% now, having previously been expected to drop to 4.5% by December.
Yesterday’s CPI data showed US prices rose by 3.5% per year in March, higher than expected, up from 3.2% in February.
The report will be a big disappointment for the Federal Reserve, says Matthew Weller, global head of research at Forex.com and City Index, addding: "Traders are souring on the potential for a June rate cut from the Fed, with the September/November timeframe now looking more likely."
The hotter-than-expected US inflation report spooked Wall Street, sending the Dow Jones industrial average down by 1.1%, and the broader S&P 500 index 0.95% lower.
Asian markets have followed suit; MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, while Japan’s Nikkei shed 0.45%.With the dollar strengthening, the yen slumped to its lowest level against the greenback since 1990, at 153.24 yen to the dollar.
The agenda • 9.30am BST: Latest UK economic activity and social change data • 1.15pm BST: European Central Bank interest rate decision • 1.30pm BST: US Producer Price Index (PPI) index • 1.30pm BST: US weekly jobless claims • 1.45pm BST: European Central Bank press conference
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