Global: Rate cuts in play. Federal Reserve officials on Wednesday (31 Jul) held short-term interest rates steady but indicated that inflation was nearing its target. Fed Chair Jerome Powell said that an interest rate cut on 18 Sep is “on the table”, on the condition that incoming US data further increases confidence in inflation moving sustainably towards the 2% target or signals the urgency to avert a potentially sharp downturn in the labour market.
US inflation markers are back to a downtrend that began more than a year ago. Key measures of inflation like the core PCE and trimmed-mean PCE, both on a y/y and m/m basis, seasonally adjusted, annualised basis, have eased to the 2.6%-2.8% range. Signs of cooling in the labour market are also starting to translate into less purchasing power – wages and salaries rose 0.3% in June, half the prior month’s pace. On an inflation-adjusted basis, disposable income growth slowed to 0.1%.
The US economy continues to deliver better-than-expected data – real gross GDP grew at an annual rate of 2.8%, double that of the 1Q24 outturn of 1.4%. This increase primarily reflected increases in consumer spending, inventory investment, and business investment. Imports increased as well, reflecting rising domestic demand. Accordingly, our view of calibrated cuts (beginning in September) still appears to be the most likely scenario going forward.
Meanwhile, the Bank of England (BOE) delivered its first interest rate cut in over four years, taking the key rate to 5%, though policymakers remain divided on whether inflation pressures had eased sufficiently. CPI returned to the BOE's 2% target in May and stayed there in June; however, the BOE expects headline inflation to rise to 2.75% in the final quarter of the year as the effect of last year's steep falls in energy prices fades, before returning to its 2% target in early 2026.
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