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UK interest rates: Bad news from the US, good news from Europe, what will the Budget bring?

Steven Bell

Chief Economist, EMEA

Key Takeaways

The upcoming UK Budget remains the subject of enormous speculation – sign up for our webinar to learn our views.
The Bank of England sets UK interest rates, but overseas influences play their part. The European Central Bank is expected to cut rates again this week.
The Federal Reserve will likely cut again at their next meeting, but the pace of reductions is now expected to be slower than previously.
Pay awards for the UK public sector will likely delay a fall in UK inflation. As in the US, the pace of rate cuts will likely be slower in the UK.

Transcript

The upcoming UK Budget has been the subject of enormous speculation and will no doubt have a big impact of its own. We will explore this topic more in our upcoming webinar.

There are of course many different interest rates but the ones that matter most to people in the UK are mortgage rates. The wholesale rates for mortgages are swap rates. These in turn reflect expectations for the Bank Rate roughly speaking over the relevant period. The Bank of England (BoE) sets that but overseas influences are also important.

Macrobond as at 14/10/2024

As you can see from the chart there is a remarkably similar pattern to their movement. As far as Europe is concerned, their rates are significantly lower, and the European Central Bank (ECB) are set to cut rates by 25 bps at their meeting this week. That’s good news and the dovish move reflects a slightly better inflation outlook in Europe and continued disappointing data on growth, notably in Germany. It’s also becoming clear that European fiscal policy is seeing higher taxes and lower spending: there’s no relaxation of Germany’s debt brake and Italy and France have announced tough budget plans. That will encourage the ECB to keep on cutting rates.

That’s not great news for Europe but it puts downward pressure on UK rates. The US is having the opposite effect and that’s dominating. Fears that rising unemployment and slowing consumer spending would lead to a recession in the US have evaporated given much stronger data in the last month or so. Recession risks have been replaced by worries that a stronger economy will lead to inflationary pressures. The markets still think the Federal Reserve will cut rates, but the pace is now expected to slower and the ultimate destination a shade higher. And that means higher US swap rates as the chart shows which feeds through to higher UK rates.

Domestic influences are also important of course and there have been concerns that the new UK government’s decision to give big pay awards to public sector workers and to raise the minimum wage by almost 6% in April will delay the fall in UK inflation – which is especially high in the labour-intensive service sectors.

The result is that the steady decline in UK mortgage rates which has seen 5-year deals offered at below 4% is over at least for now. We do think the BoE will cut rates when they meet next month but only by 25 bps and the pace of subsequent cuts will be slow.

14 October 2024

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UK interest rates: Bad news from the US, good news from Europe, what will the Budget bring?

Key Takeaways

Macrobond as at 14/10/2024

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