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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.
Interest rates hold at 5% as path set for decline
Interest rates are now gradually on a downward path, according to the Bank of England governor, after maintaining borrowing costs at 5%.
BoE Governor, Andrew Bailey noted that inflation has come down significantly, but emphasised that the Bank would need more proof that it will stay low before making further rate cuts.
The decision to keep rates steady comes as inflation remains slightly above the Bank's target, standing at 2.2% last month. Experts anticipate the Bank may lower rates again in November, with two more rate decisions left this year.
The move to hold interest rates, which was widely expected, follows a reduction from 5.25% in August—the first cut since the COVID-19 pandemic began in 2020. The base rate set by the Bank influences borrowing costs set by High Street banks and other lenders.
While higher interest rates have led to increased borrowing costs for mortgages and credit cards, savers have benefited from better returns. However, rising mortgage rates often cause landlords to hike rents to cover their increased repayments.
Despite the impacts of two major global disruptions—the Covid pandemic and the Ukraine war—consumer prices have eased but are still climbing faster than the Bank's 2% target.
The UK's economic recovery has been lacklustre. After strong growth in the first half of the year, momentum has slowed as consumers cut back due to high prices.
While the Bank noted "improved sentiment and expectations" for future growth, it expects weaker expansion of 0.3% between July and September, down from 0.4%.
The UK has experienced sluggish growth in recent years, an issue the new Labour government has vowed to address.
China unleashes new economic stimulus package to encourage growth
China has introduced a series of stimulus measures, including cuts to its benchmark interest rate, as Beijing seeks to combat the slowdown in the world’s second-largest economy.
In a rare public briefing on Tuesday, the People’s Bank of China (PBoC) also revealed government funding to boost the stock market and support share buybacks, alongside additional aid for the struggling property sector.
With growing doubts about whether China will achieve its 5% full-year growth target, PBoC governor Pan Gongsheng explained that the measures are intended to stabilise the country’s economic growth and encourage a moderate recovery in prices.
The stimulus package spurred a 4.3% jump in China’s CSI 300 index, its best performance since July 2020, while Hong Kong’s Hang Seng index rose 4%, driven by mainland Chinese companies.
European markets also responded positively, with the Stoxx Europe 600 gaining 0.8%, particularly benefiting luxury brands like LVMH, Kering, and Hermès, amid hopes that stronger consumer spending in China will follow the stimulus efforts. The FTSE 100 gained 0.5%.
Pan announced that the PBoC would lower its seven-day reverse repo rate, the central bank’s key policy rate, from 1.7% to 1.5%. Additionally, the PBoC plans to cut the reserve requirement ratio (RRR), the percentage of reserves banks must hold, by 0.5 percentage points, with the possibility of a further 0.25 to 0.5 percentage-point cut later this year. This RRR reduction would inject around Rmb1 trillion ($142 billion) of liquidity into the banking system.
China’s economic growth has slowed in recent months, as the prolonged downturn in the property market has dampened consumer confidence and restrained spending.
Economists have reduced their growth forecasts for 2024 to below the government’s 5% target due to ongoing deflationary pressures, with producer prices declining since last year.
To address the slowdown, policymakers are focusing on boosting exports, though increased shipments of electric vehicles, batteries, and other products have not fully compensated for the weaker domestic economy.
Latest data shows the US economy is heading for healthy growth period
The US economy remains on track for solid growth in the third quarter, according to new data released on Monday, though potential challenges in the manufacturing sector and rising price pressures are emerging.
S&P Global's flash US composite PMI, which measures activity across both the services and manufacturing sectors, came in at 54.4 for September, slightly down from 54.6 in August. Economists had predicted a slight dip to 54.3.
Many economists have said the figures indicate "healthy" growth for the US economy in the third quarter, which ends in September. The continued expansion in output, reflected by the PMI, suggests a solid annualised GDP growth rate of 2.2% for the quarter.
Following stronger-than-expected retail sales in August, economists have been anticipating robust third-quarter growth. As of September 18, Goldman Sachs was projecting a 3% growth rate for Q3 GDP, while the Atlanta Fed's GDPNow tool estimated 2.9% annualised growth.
Federal Reserve Chair Jerome Powell recently pointed to the economy's ongoing strength as a reason for the Fed to proceed cautiously with interest rate cuts.
However, the S&P Global data did reveal some signs of slowing. The services index dropped to 55.4 in September from 55.7 in August, and manufacturing activity continued to weaken, falling to a 15-month low of 47, down from 47.9 in the previous month. While readings above 50 signal expansion, a score below 50 indicates contraction.
Additionally, prices charged by businesses rose at the fastest pace in six months, which Williamson noted could heighten concerns about inflation.
