Stock markets ended 2023 on a wave of euphoria, as they celebrated falling inflation. Analysts expected consumer price growth to carry on sliding in 2024, allowing the Bank of England to cut interest rates in March.
They anticipated a whopping six interest rate cut across 2024. That would have cut UK base rates from today’s 5.25 percent to just 3.75 percent by year end.
If only they’d been right. Plunging interest rates would have been a massive boost for the UK economy, slashing mortgage costs, reviving the housing market, making shoppers feel richer and boosting business profits.
It may not have been enough to help Rishi Sunak win this year’s general election, but it might have helped the Tories avoid total wipeout.
Yet that scenario is looking less and less likely. Inflation did fall to 3.4 percent in February, but remains sticky. There was no rate cut in March. Few expect one at the next meeting of the BoE’s rate-setting monetary policy committee (MPC) in May. We may not even get one in June.
I have repeatedly criticised BoE governor Andrew Bailey for calling inflation wrong. In my view, he risks prolonging the recession needlessly by keeping borrowing costs too high.
Yet he does face one problem that’s not of his own making. And that’s the booming US economy.
President Joe Biden has launched an unprecedented wave of stimulus in a bid to get the US economy moving and boost his chances of re-election in November.
His strangely named Inflation Reduction Act has pumped a staggering $1.7 trillion into the US economy, mostly focused on green industries.
Instead of reducing inflation, this mighty sum has turbocharged the economy and kept inflation high. The US has exported its high inflation to the rest of the world, including the UK.
The Fed daren’t cut interest rates while the US economy is running red hot and core inflation is around three percent. That is much lower than before but still uncomfortably above the Fed’s two percent target.
Now a Federal Reserve official has issued a warning that will terrify any British homeowner who was hoping for an interest rate cut this year.
Bank of Minneapolis president Neel Kashkari has warned the Fed may not cut interest rates at all in 2024. And that’s a disaster for UK homeowners, too.
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Kashkari is changing his tune after previously predicted two rate cuts this year. And his reason? “Strong job growth, strong consumer spending and strong GDP growth.”
He’s talking about the US, remember. In the UK, we don’t have strong jobs growth, strong consumer spending or strong GDP growth.
In fact, we’re still battling to escape recession. Yet we’re stuck with US-style high interest rates.
We need rate cuts now but thanks to the US, we may not get them. My guess is that the Bailey and MPC lack the courage to be the first to stick their necks out and cut interest rates.
They would much rather leave it to the Fed to lead the charge. Or even the European Central Bank.
Both the Fed and ECB will hold their June rate-setting meetings before the BoE. Effectively, they will decide what we do.
And if they do nothing – which seems particularly likely in the case of the US – the BoE won’t either. And that would be Bailey’s fault.
The first rate cut is being pushed back and back. There’s a chance we may not get one at all this year.
Things can change quickly, so I hope I’m wrong. So will millions of homeowners who are struggling with their mortgage repayments. They’re in store for yet another tough year. Biden is to blame in this case, and Bailey won’t be brave enough to race to their aid.
