The week ahead 16 September 2024 - Fed poised to cut policy rate
What to watch out for in the UK economy and property market this week.
The July UK GDP figures came in weaker than expected, with the economy flatlining for a second month in a row. City forecasters had been predicting a figure of 0.2% month-on-month. The disappointing performance was partly due to falling output for the construction and manufacturing sectors, with vehicle production particularly hit. This was counterbalanced by modest growth for the Services sector, which expanded by 0.1% in July, marking a rebound on June’s figure of -0.1%. It is also possible the change of government may have impacted the July figures, as firms waited for the new government to roll out its agenda. Meanwhile, the labour market data for Britain painted a mixed picture. Pay growth excluding bonuses slowed from 5.4% in June to 5.1% in July, which will reduce inflationary pressures in the economy, although the unemployment rate decreased from 4.2% to 4.1%.
In the Eurozone, the ECB last week cut its policy rate by 25 bps to 3.5%, which brings us to this week’s big news stories – the interest rate announcements from the US Federal Reserve on Wednesday and the Bank of England on Thursday. The Fed has been the laggard on cutting rates among the major central banks this year, largely because inflationary pressures have been stronger in the US compared to Europe. Some investors are speculating that we may see a 50 bps reduction, although the consensus view is a 25 bps cut to 5.25%. Turning to the UK, given there was a Base Rate cut in August, and services inflation is still uncomfortably high, forecasters are predicting the Bank of England will leave the policy rate unchanged this week. We do though expect to see at least one more 25 bps cut from Threadneedle Street this year.
An important statistical release coming out this week is UK inflation. Recent survey evidence, such as the PMI index, suggests inflationary pressures are easing. Also, the oil price has been falling and the pound strengthening lately. Consequently, we are predicting little change in the inflation rate for August.
Things to watch for this week
Wednesday, 18th September
UK CPI Inflation, y-on-y, August
Previous: 2.2%
Forecast: 2.2%
Given pay growth continues to decelerate, as has GDP growth, we are forecasting the UK inflation rate remained unchanged in August.
US Federal Reserve Interest Rate Decision, September
Previous: 5.50%
Forecast: 5.25%
With a broad array of data showing inflation under control and the labour market slowing, we support the consensus view that the Fed will cut by 25 bps this week. However, a surprise 50 bps reduction is a possibility.
Thursday, 19th September
Bank of England Interest Rate Decision, September
Previous: 5.00%
Forecast: 5.00%
Having clearly signalled to the markets in August with an interest rate reduction that they intend to pivot from fighting inflation to supporting growth, we believe the Bank of England will now want to see more data before cutting again.
