Bailey hints UK will cut interest rates before US
As ‘perfect storm’ sends stock markets tumbling and bond yields rising . . .
ANDREW Bailey last night hinted that the Bank of England could start cutting interest rates before the US Federal Reserve amid ‘strong evidence’ that inflation is falling.
The comments came as the governor’s Fed counterpart Jerome Powell warned that the US’s battle to tame price rises was ‘likely to take longer than expected’ – in comments that further riled alreadyvolatile markets.
Bailey, speaking at the International Monetary Fund (IMF) in Washington, said he saw ‘strong evidence’ that the process of falling inflation was now ‘working its way through’.
He said it was possible for the path of rates on either side of the Atlantic to diverge, adding: ‘The dynamics for inflation are rather different now between Europe and the US.’
Figures today are expected to show UK inflation fell in March from 3.4pc in February, taking if further towards its 2pc target. That contrasts with the picture in the US where inflation has proved stubborn over recent months and climbed to 3.5pc in March.
Bailey’s comments were echoed by European Central Bank (ECB) chief Christine Lagarde, who told broadcaster CNBC that short of any additional shocks it would be time to ease rates in the eurozone ‘in reasonably short order’.
In contrast, Fed chairman Powell said ‘recent data have clearly not given us greater confidence’ that inflation was coming under control and ‘instead indicate that it’s likely to take longer than expected to achieve that confidence’.
Wall Street stocks – trying to recover after a sell-off a day earlier – stumbled in the wake of the comments. Markets were already in febrile mood. The FTSE 100 slumped by 145.17 points or 1.8pc to 7820.36 yesterday in its biggest decline since July last year – with similar falls seen on French and German stock exchanges.
Yields on UK ten-year government bonds – which rise as their prices fall – climbed above 4.3pc while US ten-year bonds neared 4.7pc, in both cases the highest levels since November.
‘We have the perfect storm,’ said Florian Ielpo, head of macro at Lombard Odier Investment Managers, pointing to ‘geopolitical risks, combining with existing inflation and interest rate anxieties’.
In Britain, markets were spooked by official figures showing wage growth at a higher than expected 6pc. The Bank of England wants to see pay growth cool before it stars to cut interest rates.
Signs that an escalation of conflict in the Middle East could further add to inflation pressures were also playing on investors’ nerves. And stronger- thanexpected US retail sales figures on Monday have added to signs that the world’s biggest economy is still running too hot for the Fed to start cutting rates.
The Bank of England, the Fed and the ECB all hiked rates to bring down inflation. Until now, the thinking has been that rates would not come down any faster in the UK and the eurozone than in the US because of the likely currency impact. Earlier cuts here would be likely to weaken the pound and the euro versus the dollar, pushing up import costs and adding to inflation.
Yesterday’s comments from Bailey and Lagarde suggested such fears were being pushed to one side. And last night markets were betting the Bank of England will begin cutting in August with the Fed not acting until September.