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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.
Surprise fall in UK inflation paves way for interest rate cuts
UK inflation unexpectedly decreased to 1.7% in the year leading up to September, marking the lowest rate in three and a half years.
This decline brings the annual price increase below the Bank of England's 2% target, potentially paving the way for further interest rate cuts.
The drop in inflation was primarily driven by lower airfares and petrol prices, according to official statistics. Additionally, September's inflation figure typically informs the adjustments for various benefits scheduled for an increase next April.
Currently, UK interest rates stand at 5%. The Bank of England made its first rate cut in August but chose to maintain the rate last month.
Many anticipate another cut in November, but the unexpectedly low inflation rate could also lead to a potential cut in December.
However, experts warn that while a rate drop next month seems likely, inflation could rise again, particularly with household energy bills set to increase by about 10% this month.
The Bank's base interest rate significantly affects the rates that high street banks and lenders charge for loans and credit cards.
Higher rates have resulted in increased borrowing costs for mortgages, although savers have benefited from better returns. Additionally, higher mortgage payments for landlords may lead to increased rent prices.
The cost of living has surged in recent years, with inflation peaking at 11% in 2022—far above the Bank of England's 2% target—largely due to rising energy prices following Russia's invasion of Ukraine.
In response, the Bank raised interest rates to encourage reduced spending and curb inflation.
While the inflation rate has fallen, this doesn't imply that prices for goods and services are decreasing overall; it simply means that they are rising at a slower rate.
September's inflation figures are typically used to determine increases in various benefits starting in April. This includes the most significant benefit, universal credit, which is adjusted at the government's discretion.
IMF expects slow growth for the global economy as issues arise
New forecasts from the International Monetary Fund (IMF) suggest a challenging future for the global economy, characterised by sluggish medium-term growth, rising trade tensions, and elevated debt levels, according to IMF Managing Director Kristalina Georgieva.
Speaking ahead of the upcoming annual IMF and World Bank meetings, she presented a sobering outlook but emphasised that there are still opportunities to enhance growth, reduce debt, and strengthen economic resilience.
Georgieva highlighted the persistent high prices that disproportionately impact the poor and warned about the potential destabilising effects of the escalating conflict in the Middle East on regional economies and global commodity markets.
She also expressed concern over rising military expenditures, which could divert funds from other critical priorities, including aid to developing nations.
The rise in protectionism and trade restrictions is further fragmenting the global economy, hindering trade growth. On a positive note, she mentioned signs of easing global inflation and a move toward price stability, with labour markets in the U.S. and Europe cooling in a manageable way.
While she noted that the United States is not in recession, despite the onset of Federal Reserve rate cuts that have historically led to downturns, she also indicated that unemployment rates are expected to remain relatively low.
However, she stressed that current growth levels are insufficient to eliminate global poverty, create the necessary number of jobs, or generate the tax revenues needed to manage heavy debt loads.
Georgieva pointed out that rising public debt exacerbates the economic outlook, warning that adverse scenarios could push debt levels 20 percentage points of GDP above current forecasts.
This would force governments to make difficult decisions about fund allocation, particularly in emerging market economies.
To reverse this trend and stimulate growth, she urged countries to focus on reducing debt, rebuilding financial buffers for future shocks, cutting spending, and enhancing productivity.
ECB poised to make further rate cuts as economic outlook worsens
The European Central Bank (ECB), responsible for setting interest rates across the 20 euro-using countries, is expected to lower borrowing costs again.
This move follows new data showing inflation in the eurozone dropping to its lowest level in over three years, alongside slowing economic growth.
At a meeting in Ljubljana, Slovenia—away from its usual base in Frankfurt—the ECB’s governing council is anticipated to reduce its benchmark rate from 3.5% to 3.25%. This would mark the third rate cut since June.
Inflation has been falling faster than expected, with the September figure at 1.8%, the first time it’s been below the ECB’s 2% target in more than three years.
Analysts predict further cuts, possibly in December, as the eurozone's sluggish growth—just 0.3% in the second quarter—reinforces expectations that ECB President Christine Lagarde won’t resist easing monetary policy.
A major factor in the global decline in inflation is that central banks sharply raised interest rates from near zero during the pandemic.
Prices surged initially due to supply chain disruptions, then rose further after Russia’s invasion of Ukraine, which drove up energy costs.
The ECB began increasing rates in mid-2021, eventually reaching a record high of 4% by September 2023 in an effort to control inflation.
However, this aggressive approach has also slowed growth, as higher borrowing costs make it more expensive for businesses and consumers to finance spending.
