BANK OF ENGLAND FACES 'TAXING' TIMES AS GROWTH STALLS

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·???????? Bank of England Faces 'Taxing' Times as Growth Stalls

·???????? Fed's 0.25% rate cut but next year’s forecasts are reduced due to Trumps expected policies

The Bank of England has warned that the economy is stagnating as companies respond to Rachel Reeves's tax increases by raising prices and cutting jobs. Policymakers now expect zero growth in the last quarter of 2024, down from a previous forecast of 0.3%. The economy contracted in October, raising recession fears.

While interest rates were kept on hold at 4.75%, Governor Andrew Bailey said future rate cuts are uncertain due to the Chancellor's Budget.

?A Bank of England survey indicated that employers are reacting to a ￡25bn rise in national insurance contributions by increasing prices and halting hiring, rather than cutting wages. Policymakers noted that uncertainty over pay, including a significant minimum wage hike, supports a gradual approach to easing policy restrictions.

?Investors are now expecting only two rate cuts next year, suggesting borrowing costs will stay higher for longer. Bailey emphasised the need to meet the 2% inflation target sustainably and said the Bank would take a cautious approach to future rate cuts, given the economic uncertainty.

Rachel Reeve’s Budget certainly hasn’t gone down well with workers, pensioners or employers. It seems its main objective was to introduce the tough decisions early in the Parliament – but if growth stalls, further tough decisions may also be needed.

Fed's 0.25% rate cut but next year’s forecasts are reduced due to Trumps expected policies

The Federal Reserve cut interest rates by 0.25 percentage points to a range of 4.25-4.5%, marking the third consecutive cut. Despite this, the Fed signalled a slower pace of easing next year, causing a significant sell-off in US and international stock markets. The S&P 500 and Nasdaq Composite fell sharply, with major tech stocks like Tesla, Meta, and Amazon declining.

Projections for 2025 indicate fewer rate cuts than expected, reflecting inflation concerns. Cleveland Fed president Beth Hammack dissented, preferring to keep rates steady. Global markets were also impacted, with European and Asian stocks falling and the US dollar reaching a two-year high. The two-year Treasury yield rose, and the South Korean won and Japanese yen weakened against the dollar.

?Fed Chair Jay Powell noted that policy is now "significantly less restrictive," allowing for a more cautious approach to future easing. Inflation is moving "sideways," and labour market risks have diminished. The Fed aims to manage demand and business activity to bring inflation back to its 2% target without harming the job market. The core personal consumption expenditures price index rose at an annual rate of 2.8% in October.

Concerns about inflation staying above 2% led to projections of fewer rate cuts in 2025, with the main rate expected to be 3.75-4%. Powell mentioned that forecasts now include assumptions about policies planned by Donald Trump. Four policymakers anticipated one or no quarter-point cuts next year, a shift from the previous forecast of a full percentage point of cuts.

This is a disappointing end to the year and while Trump’s policies would appear to be inflationary, there is no guarantee at this point that they will be implemented as expected. Another troubling development is that the US government is on the verge of another shutdown as Congress struggles to reach agreement on the latest short-term funding deal which could also impact on markets and growth depending on how and when it is resolved.

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