Sticky inflation further dampens rate cut predictions

Macro Commentary

It has been a relatively quiet week as macro uncertainty leads to a lack of real conviction and month end dynamics drive market flow. The UK budget next week has been dominating the headlines, as the government sets out its stall ahead of the election later this year, and the market weighs the fiscal implications for the growth outlook.

Forecasters continue to trim central bank rate cut expectations, with inflation expected to prove stubbornly sticky, and the authorities particularly keen not to cut too early, which could significantly damage the economy and lead to huge reputational risk.

The Bank of England is priced to reduce rates by a cumulative 0.60% this year starting in August, with elevated wage inflation the main barometer of concern for policymakers, and the effect on second-round inflationary pressures. The committee remains conscious that the full extent of interest rate increases has still not fully fed into the underlying economy.

In the US, rhetoric from central bank officials on keeping rates higher for longer and the ongoing inflationary pressures have seen rate cut expectations drop to around 0.80% for this year, from 1.50% at the turn of the year. The US economy continues to strongly outperform, and policymakers will remain driven by the data, and extremely cautious of acting prematurely.

In Europe, market focus is on today’s inflation data and what it means for monetary policy, with forecasters pushing back an initial rate cut to June, but pricing in almost 1% of cuts this year.

On the exchanges, we remain very much within recent ranges on a lack of real momentum and low liquidity, with the outlook for interest rate differentials continuing to drive the narrative.

GBP/USD – 1-year chart

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