US inflation shock dents rate cut hopes

Borrowing costs soar in market turmoil

INTEREST rate cut hopes faded on both sides of the Atlantic yesterday after US inflation rose to a higher-than-expected 3.5pc.

The figures wreaked havoc on financial markets as bond yields soared, Wall Street stocks tumbled, and the pound fell sharply.

Paul Ashworth, chief North America economist at Capital Economics, said that the data ‘pretty much kills off hopes of a June rate cut’ from the Federal Reserve.

And Larry Summers, the former US Treasury Secretary, said it might even mean the next move from America’s central bank is a hike.

Market bets on the timing of a Bank of England rate cut were also pushed back – from June to August – as the likely delay at the Fed gives pause to officials at Threadneedle Street.

But the odds of the Bank moving first have now increased, sending the pound sharply lower yesterday against the dollar to $1.25.

Investors will also be focused on the European Central Bank’s plans when it announces its rates decision today – although it is not expected to act yet.

The US inflation data showed that annual consumer price inflation in the world’s biggest economy rose from 3.2pc in February to 3.5pc in March. Economists had pencilled in a smaller rise to 3.4pc.

It was the third month in a row that the inflation figure had come in higher than expected.

Markets were also alarmed that a ‘core’ measure of inflation, which strips out volatile food and energy costs, remained at a stubbornly high 3.8pc. It had been predicted to fall.

The figures are likely to scramble plans by the Fed, which is chaired by Jerome Powell ( pictured) for rate cuts this year. Last month, it signalled that it was likely to cut rates three times in 2024. But now financial markets are betting there will only be two, and that the likely start date will be in September rather than June.

Summers told Bloomberg TV: ‘You have to take seriously the possibility that the next rate move will be upwards rather than downwards.’

In New York, the S&P 500, Dow Jones and Nasdaq stock indices all fell by around 1pc.

Yields on US ten-year bond yields – the rate investors charge for lending to the government – climbed above 4.5pc to the highest level since November.

UK ten- year bond yields climbed to nearly 4.2pc, the highest level in a month.

Bob Doll, chief investment officer of Crossmark Global Investments, said: ‘This is the third month in a row the report has been hotter than expected.

‘So what it’s saying is inflation is not under control and the Fed therefore is unlikely to lower rates any time soon.’

Speculation about the timing of a US interest rates cut has been building.

The US central bank raised rates aggressively during 2022 and in the first half of 2023 as it battled to bring down inflation.

It had seemed to be winning when inflation fell to 3pc last summer but since then it has stubbornly refused to fall further towards its 2pc target.

Now, Britain is catching up, with inflation down to 3.4pc in February and expected to have dropped further when March figures are published next week.

That could mean UK inflation running below US inflation for the first time in two years.

Daniele Antonucci, chief investment officer at Quintet private bank, said the timing of a Fed rate cut was ‘now more than uncertain than ever’.

‘We see a greater chance that the European Central Bank and the Bank of England start their rate cutting cycle ahead of the Fed,’ he added.