‍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.

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UK interest rates expected to rise for 14th time in a row

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Interest rates are expected to rise for the 14th time in row as the Bank of England continues its battle to control stubbornly high price rises.

Most economists have predicted the Bank will increase rates to 5.25% from its current 5% at midday on Thursday. That would mean higher interest rates on mortgages and loans for some people, but also higher savings rates.

UK inflation remains elevated and is continuing to put households under pressure. The last time interest rates stood at 5.25% was 15 years ago in April 2008. However, a rise to 5.25% would mark a smaller increase than July's dramatic rise to 5% from 4.5% and follows signs that price rises have begun to ease.

Inflation fell by much more than expected in June and at 7.9% is at its lowest level in over a year but remains nearly four times higher than the Bank of England's 2% target, and now many are predicting that this policy would not need to hike interest rates as much as previously thought.

By making borrowing more expensive the Bank's aim is that people will spend less money, meaning households will buy fewer things and then price rises will ease as a result.

But it is a balancing act as raising rates too aggressively could cause the economy to slump, but not raising them at all could lead to inflation rising even more.

There are signs that higher rates are already affecting the UK economy with house prices falling at their fastest annual rate in 14 years in July, according to banking society Nationwide.

UK interest rates had previously been expected to peak above 6% but when inflation eased in June, markets changed their forecasts to a peak of around 5.85%. Other impacts of higher rates include charges on some non-secured loans and credit cards going up.

US economy beats expectations with newly observed spring surge

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US economic growth picked up this spring, despite a slowdown in consumer spending.

The world's largest economy expanded at an annual rate of 2.4% in the three months to June, accelerating from a rate of 2% in the prior quarter. A value that was far better than expected, lifted by a jump in business investment nationwide.

Consumer spending increased at an annual rate of 1.6%, slowing after a surge at the start of the year.

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Analysts have been warning of a looming slowdown for months as the US central bank, the Federal Reserve, raises interest rates sharply to try to stabilise prices, which soared last year.

But businesses and households have continued to spend, despite the rise in borrowing costs, contrasting heavily against the expectations of forecasters. 

That may help the US economy avoid a recession, but some economists also warned it may make it more difficult to root out the inflation pressures fully - potentially leading to even higher interest rates in the months ahead.

Inflation, the rate at which prices rise, was 3% in the US in June, down sharply after peaking at more than 9% last year. The fall followed easing in global food and oil prices, as markets adjusted after the shock from Russia's invasion of Ukraine last year.

Federal Reserve chairman Jerome Powell said this week that he thought the economy was likely to have to slow further before policymakers could feel confident they had stamped out the problem.

At 3.6%, the unemployment rate in the US remains unchanged from when the Fed started its rate-hiking campaign, he noted.

Wages are also rising, helping to sustain consumer spending. Average hourly pay was 1.2% higher in June than it was a year ago, after adjusting for inflation - outpacing price increases for the first time since 2021.

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