The message that interest rates are staying at elevated levels during 2024 is set to be reinforced by central bankers in Washington and London over the next 24 hours.
The Federal Reserve will tonight keep its base rate in the range of 5.25-5.5% but with the strength of the US economy meaning one more increase is still a possibility.
The Bank of England’s monetary policy committee voted 5-4 to pause rate rises in September, with weaker near-term inflation and growth expectations meaning tomorrow's decision is likely to see 7-2 in favour of no change at 5.25%.
Both central banks will reiterate that policy will must remain restrictive for longer and that the door remains open for further action in the event of persistent inflation pressures.
The Bank of England’s updated projections will be consistent with that message, with no rate cuts seen during 2024. The City is currently pricing in the first reduction in December 2024, putting the UK behind forecasts for the European Central Bank and Federal Reserve.
That said, there are economists in the City who see the Bank being in a position by next summer to start the process of taking rates back towards a more neutral setting.
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They include ING’s James Smith, who expects core inflation of 3% by that point and with the full impact of past tightening still to come through.
His favoured gauge of how much tightening is still to play out is the average rate of outstanding mortgages. That has gone from a low of 2% to 3.1%, potentially rising to 4% by the end of 2024 as fixed rate deals are refinanced.
He said: “In that environment, we think 5%+ rates are unlikely to be sustainable beyond next summer, and we expect a gradual cutting cycle that takes back to the 3% area later in 2025.”
Capital Economics expects inflation to remain sticky over the next year and sees the Bank having to keep interest rates at their peak of 5.25% until late in 2024.
But it believes that markets have gone too far concluding that rates will still be as high as 4.5% by the end of 2025.
The consultancy said: “We think a mild recession and an eventual easing in core inflation will mean interest rates will fall to 3% by the end of 2025.”
For investors, it believes the prospect of lower interest rates and a further bout of enthusiasm for artificial intelligence should help the FTSE 100 end 2024 almost 20% above current levels.
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The higher for longer rates outlook has been one of the factors impacting stock market confidence in recent weeks, with the S&P 500 index down in October for a third month in a row.
The rate jitters come amid signs that the US economy is proving to be surprisingly resilient to the recent Fed tightening, with third quarter GDP growth at an annualised rate of 4.9% the strongest showing since the end of 2021.
Bank of America believes part of the story is that a large share of consumers and businesses are locked into low borrowing rates, blunting and delaying the impact of Fed hikes. It adds that this may create a lag that does not meaningfully impact borrowers until late 2024 or early the following year.
Although the spike in the 10-year Treasury yield to 5% is doing much of the Fed’s work, the bank believes a further rate rise by the central bank in December remains a close call.
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