Fast reading
- The improving outlook for UK assets was boosted by better-than-expected first quarter GDP data, showing the UK economy grew by 0.6% between January and March.
- The yield on the 2-year UK gilt has fallen more than 5% since the start of May to 4.2%. The blue-chip FTSE 100 Index has risen more than 13% since mid-January.
- Sweden’s Riskbank cut its benchmark rate by 25bps to 3.75% this week, the first time Sweden’s central bank has loosened policy ahead of the US Federal Reserve in 24 years.
The Bank of England kept rates at 5.25% at its meeting this week in line with expectations1. The Monetary Policy Committee (MPC) was split with seven members voting to hold rates and two voting to cut immediately, adding to market expectations the central bank will ease policy soon. Governor Andrew Bailey’s dovish comments in the press conference suggested a summer cut may be on the cards, possibly in June.
UK inflation fell to 3.2% year-on-year in March2, the lowest annual rate of price rises in more than two years.
Figure 1: Consumer price Indices (US, UK and eurozone)
Upcoming data releases will play a crucial role in future policy decisions ahead of the central bank’s meeting in June, says Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited.
“The 2026 and 2027 consumer price index (CPI) forecasts put inflation below 2%, which underpins a dovish bias in the committee and is providing a set up for a June cut. However, there are still clear concerns around wage growth and so the committee are guiding a data-dependent approach.”
Ahead of expected rate cuts, the UK gilt market continued to rally. The yield on the 2-year UK gilt has fallen more than 5% since the start of May to 4.2% on Friday at 12:003.
The improving outlook for UK assets was boosted by better-than-expected first quarter GDP data released on Friday, showing the UK economy has exited last year’s technical recession and grew by 0.6% between January and March, the fastest growth in two years4. The blue-chip FTSE 100 Index has risen more than 13% since mid-January5.
Upcoming data releases will play a crucial role in future policy decisions ahead of the central bank’s meeting in June
Sweden’s tightrope
The rate cutting cycle has already begun in other parts of Europe. Sweden’s Riksbank cut its benchmark rate by 25bps to 3.75% this week, with the central bank indicating it is likely to cut rates two more times in the second half of the year as inflation continues its downward trajectory.
The cut marks the first time Sweden’s central bank has loosened policy ahead of the US Federal Reserve in 24 years, says Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes Limited, adding that such a move also carries potential risks.
“Sweden, with its first interest rate cut in eight years, became only the second central bank to break the thin ice this year. We do not anticipate the Fed cutting in the short term as Sweden’s rate cut is aimed at giving a breath of life for its stalling economy, while the US economy figures have generally been hot. It is, however, worth noting that Sweden’s Riksbank is walking a tightrope with the latest cut. A devalued currency risks adding to already high inflation,” she notes.
“In the US, we still see potential rate cuts to be some months out and with no probable actions occurring prior to the September FOMC meeting, catalysts to watch out for are talks from Fed spokespeople, and traditional readouts: GDP, inflation and unemployment,” she adds.
For further insights on fixed income, please see: Green bonds boom boosts case for credit engagement
Hear from our investment teams:
Extra innings | Federated Hermes Limited (hermes-investment.com)
Share:
1 The Financial Times, as at 9 May 2024.
2 Office for National Statistics.
3 www.marketwatch.com as at 10 May.
4 The Financial Times, as at 10 May 2024.
5 FTSE 100 FTSE overview | London Stock Exchange as at 12:00 on 10 May.
