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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Bank of England expects interest rates to remain at 5.25%
Interest rates are expected to remain at 5.25% for the seventh consecutive time by the Bank of England on Thursday.
Despite inflation reaching the central bank's target level for the first time in three years, most economists predict that the rates, currently at a 16-year high, will not be reduced. They believe the Bank will wait to see if inflation remains at 2% in the coming months, with a rate cut now more likely in the autumn rather than the summer.
The Bank's decision comes ahead of the general election, where future economic policies for the UK will be a key political issue. After data showed inflation fell to 2% in the year to May, many economists stated that it proved that "difficult decisions" were yielding results.
The Bank of England operates independently of the government and its main role is to keep inflation, which measures the rate at which consumer prices rise, stable at 2%. In response to high inflation, the Bank has raised and maintained high interest rates in recent years to slow inflation and ease the cost of living.
Analysts also believe rates are unlikely to be cut due to higher-than-expected services inflation, which includes prices for cinema tickets, restaurant meals, and holidays.
Higher interest rates have increased borrowing costs for mortgages, credit cards, and loans, but have also raised returns on savings. The theory behind rising rates is that it will slow inflation, but it can also hinder economic growth as businesses may delay investment or hiring, potentially resulting in fewer job creations.
According to data from the BSA released on Thursday, more than half of people surveyed believe the deposit required to buy a home is too high, with the figure rising to two-thirds for first-time buyers.
The average first-time buyer now needs a household income of more than £60,000 to enter the property market, based on data from Zoopla released on Thursday.
UK interest rates began to rise from near zero in 2021 as prices increased rapidly following the end of Covid lockdowns, driven by soaring demand for goods and services.
Energy prices then surged after Russia's invasion of Ukraine, pushing inflation to a 40-year high of 11.1% in October 2022.
European stocks close higher as investors react to ongoing market decision making
European stocks saw an uptick on Thursday, as U.K. investors anticipated the Bank of England’s policy rate decision.
The pan-European Stoxx 600 increased by around 0.4% in morning trading, with most sectors and major bourses in positive territory. Technology and construction stocks led the gains, both rising over 1%, while food and beverages stocks fell by 0.6%.
On Thursday, the Swiss National Bank announced a 0.25 percentage point reduction in its policy rate, bringing it to 1.25%. This move, anticipated by two-thirds of economists surveyed by Reuters, follows a similar cut in March and maintains the SNB’s position as a leader in the global policy easing cycle.
U.K. traders are particularly focused on the Bank of England’s rate decision on Thursday, although the central bank is widely expected to maintain the rate at a 16-year high of 5.25%.
Most economists polled by Reuters predict a rate cut in August, following the country’s July 4 election.
Data released Wednesday indicated that U.K. inflation rose by an annual 2.0% in May, aligning with the central bank’s inflation target.
Norway’s central bank is also set to announce its monetary policy decisions on Thursday, with expectations that the Norges Bank will keep the policy rate unchanged at 4.5%.
Investors are also watching for earnings reports from Boohoo Group and DS Smith. Shares of Evotec, a Germany-based drug discovery and development company, surged more than 7% on Thursday, making it the top performer in the European benchmark.
Conversely, Britain’s Tate & Lyle dropped towards the bottom of the index, with shares falling nearly 4% after announcing an agreement to acquire U.S.-based CP Kelco for $1.8 billion.
Overnight, Asia-Pacific markets were mostly lower on Thursday as China kept its one- and five-year loan prime rates unchanged.
Meanwhile, S&P 500 futures remained relatively stable as investors looked for the benchmark to add to its latest record high.
On the data front, flash consumer confidence figures from the eurozone for June are expected to be released.
Federal Reserve holds interest rates at two-decade high as it waits for inflation to cool
The Federal Reserve held interest rates at a two-decade high on Wednesday, as it awaits further signs of inflation cooling.
Officials at the US central bank now expect to cut rates just once this year, according to projections released after their latest two-day meeting. This is a change from March, when policymakers anticipated three rate cuts this year.
Currently, rates are being held between 5.25% and 5.5%, where they have remained for nearly a year. While Fed Chair Jerome Powell acknowledged that price growth is “still too high,” he noted recent official data indicating that inflation has eased.
The consumer price index (CPI) data released on Wednesday showed a slight cooling of inflation in the US last month.
The CPI rose at an annual rate of 3.3% in May, down from 3.4% in the previous month. This marks a significant decline from two years ago when price growth surged above 9% during the economic fallout of the Covid-19 pandemic.
Despite this improvement, inflation has not fallen as far as policymakers desire, and many Americans continue to feel the financial strain.
In May, falling fuel prices and airline fares, along with flat grocery price inflation, helped stabilise the headline inflation rate. However, rising shelter costs, including rent, contributed to maintaining the annual inflation rate.
On a month-to-month basis, overall prices were unchanged, bolstering hopes that inflation is returning to more normal levels. The “core” consumer price index, which excludes volatile food and energy prices, also rose at a weaker-than-expected monthly rate of 0.2%.
Despite the slight cooling, it was not enough for Fed officials, who emphasised the need for inflation to hit their 2% target. The Fed must balance managing inflation with maintaining a strong labour market, which can weaken when interest rates are too high.
So far, the labour market has remained robust despite high interest rates. In May, job additions exceeded expectations, and unemployment has been below 4% for the past two years, the longest stretch in more than 50 years.
