How far, how fast?

The US Federal Reserve cut interest rates by 0.5%, wrong-footing many forecasters who thought it would be less. More are on the way, but in smaller doses, in all likelihood. Meanwhile, the Bank of England remained cautious and maintained Bank Rate at 5%. The UK has a bit more work to do on the inflation front, justifying a more steady pace of cuts. UK retail sales rose strongly in August, but it’s a potentially short-lived bounce as consumers have since expressed some jitters as the October Budget looms into view. A timely reminder of the backdrop to the first fiscal event of the new Government came in the shape of public debt hitting the unwelcome level of 100% of GDP in August – a level unseen since the early 1960s!

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Check out a glossary of key terms here.

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What’s the latest in the UK?

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Bank of England maintains bank rate at 5%. The move was widely expected with most forecasters (and market pricing) in agreement that November will see the second 25bps cut from the Bank of England this year. The recent UK economic indicators were broadly in-line with the Committee’s expectations set out in the August Monetary Report, so the BoE remains in no rush to speed up the pace of rate cuts. Both services price inflation and private sector weekly earnings growth are trending in the right direction but remain elevated. The right policy prescription is a slow and steady approach, highlighted in the meeting minutes – “In the absence of material developments, a gradual approach to removing policy restraint remains appropriate.” Read more here.

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Inflation held steady at 2.2% in August, aligning with consensus but below the MPC's forecast of 2.4%. Food and fuel prices exerted some downward pressure, but this was offset by increases in the prices of household equipment, recreation and a large surge in airfares. Consequently, core inflation rose from 3.3% in July to 3.6% in August. Services inflation rebounded to 5.6% from 5.2%, and is down by less than a percentage point since December last year. Renewed progress on getting that all-important price measure down should be close at hand, as indicated by forward looking measures such as the PMI services output price index. It’s the key to lower rates. Read more here.

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UK public debt in August reached 100% of GDP, a level unseen since the early 1960s. Borrowing hit ￡13.7bn in August 2024, the third-highest August figure since records began in 1993. The debt-to-GDP ratio surged by 4.3 percentage points year-on-year. Year-to-date borrowing reached ￡64.1bn, also the third highest on record. These figures present a stark challenge for Chancellor Rachel Reeves as she prepares her inaugural Budget, balancing demands for increased public spending against limited revenue options, given promises to maintain various tax rates. Read more here.

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Consumer confidence plummets despite August retail growth. UK consumer confidence dropped sharply in September, with the GfK index falling 7 points to -20, its lowest level since January. Concerns about potential tax hikes and welfare cuts ahead of the October Budget potentially dampened sentiment, according to GfK, with consumer confidence in both personal finances and the broader economic outlook declining. Despite this, UK retail sales showed resilience in August, rising 1% month-on-month, boosted by warmer weather and stronger spending on clothing and groceries. The test from here will be whether the drop in confidence slows retail momentum, which looks to be well supported given rising real wages and easing inflation. Read more here.

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House prices drop in July but should rebound as interest rates fall. The seasonally adjusted official house price index fell for the first time since December, by 0.4% month-to-month. Year-over-year growth dropped to 2.2% from 2.7%. The average quoted interest rate on a 2-year fixed rate 75% LTV mortgage was 4.80% in August, down from a 2024 peak of 5.19% in May and will fall further as lower market interest rates feed through. That should pave the way for the house price index to return to growth. Complementary indices such as Nationwide and Halifax have returned to growth after they showed house prices dropping slightly in the spring. Housing market activity has started to pick up while falling mortgage rates should further boost demand for housing in the coming months. Read more here.

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Positive sentiment grows amid stable economic conditions. The September MPC meeting reviewed intelligence from the Bank's Agents, gathered through late August. Economic conditions remain stable, with improving real incomes and the recent Bank Rate cut boosting sentiment and expectations for increased activity into 2024 Q4 and 2025. While consumer demand is subdued, there are hopes for a pickup in autumn. Corporate credit demand is gradually rising, and housing market sentiment has improved, though housebuilding remains stagnant. Manufacturing growth is weak but expected to recover. Employment intentions are slightly positive, with pay settlements averaging around 5.5%. Finally, price inflation for consumer goods is low, while services inflation remains elevated. Read more here.

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What’s the latest in the US?

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Back with a bang. The interest rate setters at the US Federal Reserve made their first cut to interest rates last week, coming in with a chunky 0.5% reduction to the refi rate. Chairman Jerome Powell was keen to stress that such a big move wasn't because they were late, a view held by many analysts, but reflected their confidence that the threat of a return to inflation was diminished. Still, the projections also included the "dot plot" of committee members' estimates of how much rates will fall in the remainder of the year and showed a majority expecting another 0.5% of rate cuts to come across the next two meetings and then roughly another 1% reduction in 2025.? Plenty of fireworks from the Fed expected then. Read more here.

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What’s the latest in the Eurozone?

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Consumer confidence still on the rise. The Eurozone's consumer confidence index rose to -12.9 in September from -13.5 in August, slightly surpassing the consensus of -13.0. This modest improvement, though slower than earlier in the year, is attributed to rebounding real income growth, which has positively influenced consumer sentiment despite sluggish overall growth and weak investment. While real income is expected to remain positive, risks such as a soft labour market and impending fiscal tightening could negatively impact consumer spending. The ongoing difficulties of the region’s biggest economy – Germany – is another drag. Read more here.