Not yet, but future cuts a possibility

Comments by Ranjiv Mann , Senior Fixed Income Portfolio Manager at AllianzGI, ahead of the Bank of England meeting on 19th September 2024:

Key Takeaways:

• We think the BOE will likely leave the Bank rate on hold at 5% on 19th September but send a clear signal to cut rates at subsequent meetings.
• With most G10 central banks now focussed on growth rather than inflation risks, the fear is that the BOE could wait too long to adjust its restrictive policy stance.
• The market is currently pricing around 100bp of UK rate cuts by end-Q1 2025; we think that further rate cuts could well be priced in the near-term, especially if the US Federal Reserve and European Central Bank signal a front-loaded rate cutting cycle.

UK economic growth has confounded the gloomiest expectations at the start of this year; growth has been edging higher, with the market expecting just over 1.0% real GDP growth this year[1]. Core UK CPI inflation (at 3.3% y/y)[2] has also been stickier than in other developed markets. Following a 25bp rate cut in August, more recent comments from BOE Governor Bailey indicated that it was too early to declare victory on the fight against inflation, cautioning against a fast pace of rate cuts ahead. We therefore think that a majority of MPC members are likely to favour keeping rates unchanged at the September meeting.

Beyond the September meeting, however, we think that the UK labour market will continue to loosen, with wage growth and services inflation cooling further, supported by the disinflationary trend coming from energy prices.

Meanwhile, the UK government is facing significant fiscal challenges and is set to maintain a tight fiscal stance at the upcoming Autumn Budget on 30th October.

The global economic growth backdrop is also beginning to flash some warning signals. Markets are beginning to pare back their lofty expectations for US growth, European and Chinese growth remains lacklustre and corporate fundamentals are starting to be challenged. Against this backdrop, commodity and energy prices are increasingly coming under downward pressure, pushing inflation expectations lower globally.

With economic data likely to continue supporting front-loaded rate cuts amongst other G10 central banks over the coming months, we expect the BOE to also signal its desire to ease policy further at subsequent meetings this year and into 2025.

?

Gilt market implications

We think markets have now sufficiently priced the improvement in the UK growth outlook, while inflationary pressures in the economy are also set to moderate. In addition, the UK fiscal stance is likely to become a drag for UK growth prospects. We believe that interest rate markets are insufficiently pricing BOE rate cuts over the next six to nine months in comparison to the European Central Bank and US Federal Reserve, and Gilt valuations increasingly look attractive versus other G4 markets.

In light of the above, we currently favour owning Gilts on a relative value, cross-market basis against German Bunds.

The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement.

?

For fund distributors and professional investors only. This is?not a recommendation to invest in any?security/strategy.?

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors. [AM 3857101]

[1] Bloomberg, August 2024

[2] Bloomberg, 10 September 2024