UK and US headline interest rates are now expected to be stuck nearer to 4% until the end of next year than the 3.5% earlier forecast, according to AJ Bell investment director Russ Mould.
Inflation has edged back up slightly in the US and the economy remains relatively robust despite rates still being elevated by the standard of the past decade and a half.
“It could be down to sticky inflation, worries about government borrowing levels, or the absence of a long-awaited recession, but investors are starting to cut back on the number of interest rate cuts they are expecting from both the US Federal Reserve and the Bank of England,” Mould said.
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“A month or two ago, markets were pricing in a Fed funds rate and a Bank of England base rate as low as 3.5% by next Christmas, but 4% now seems to be the current consensus for 12 months’ time.”
Mould said we could see just three one-quarter point cuts from the current level, which is 4.75% on both sides of the Atlantic after the reductions sanctioned by the UK’s Monetary Policy Committee and the Federal Open Markets Committee at their November meetings.
“The Fed is expected to cut by 0.25% to 4.50% on 18 December but markets seem less convinced the Bank of England will act the following day, as an easing of policy is currently seen as a 50-50 chance, despite last week’s uninspiring print for GDP growth in the third quarter,” he added.
There are of course implications for various asset classes should rates remain stubbornly high. Positive sentiment on equities could take a hit if conditions are tighter than forecast.
“That does not really fit with equity markets’ preferred narrative, and it probably is not ideal for the UK or US economies either, given what higher borrowing costs would mean for governmental interest bills,” he said.
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“Some share prices are starting to listen to the bond markets, however. Sectors that are seen as bond proxies, such as utilities, are coming under a little pressure.”
