Summer is here – time for suncream, BBQs, and central bank rate cuts?

With a number of central bank meetings taking place recently and monetary policies being reviewed, now is a good time to catch up on things. Chief Investment Officer Jeff Brummette, takes a closer look at what changes (or lack thereof) are being proposed by the governing bodies in our June 2024 Central Bank Update.

Summer has arrived, bringing with it the first major central bank rate cut. The European Central Bank (ECB) lowered rates by 25 basis points at the beginning of this month. Will the Bank of England (BoE) and the Federal Reserve Bank (Fed) soon follow the ECB’s lead?

Remember the anticipation and confidence at the beginning of this year regarding a series of interest rate cuts? Headline inflation continues to decline and is approaching the central banks 2% target. In fact, the UK has just seen headline CPI fall to 2% this week.

Source: Bloomberg

All three central banks continue to assert that their future policy decisions, particularly regarding interest rates, will be driven by economic data and the trajectory of inflation.

The ECB has already made an initial move by lowering rates, signalling its confidence that inflation will trend downward. However, they also emphasised that there is no predetermined plan for additional rate cuts and that any future actions will depend on ongoing economic data. This cautious approach underscores the central banks’ commitment to ensuring that inflation is kept in check while supporting economic stability.

The Fed met last week on the very day that the May US CPI data was released and chose to hold rates steady. Notably, they adjusted their forecast for the future level of rates, now predicting only one rate cut this year, down from their March projections when they were predicting three cuts. Chair Powell emphasised there really was not much difference in predicting one cut or two and that the Fed remained very data dependent as well. He also reiterated that they see rates falling if inflation moves lower or if the labour market showed sudden signs of weakness. If inflation remains sticky at current levels, they will simply keep policy on hold.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, June 2024

Source: The Federal Reserve

At their meeting today (20th June), the BoE also kept rates unchanged at 5.25%. They acknowledged progress in reducing the headline inflation figure moving lower but expressed concerns about services inflation, which remains elevated at 5.7%. The BoE is not yet confident that inflation is on a sustainable path to their 2% target. They also cited that growth had been stronger than they had previously forecast and emphasised that the upcoming General Election had no influence on their decision to maintain current rates.

For investors, the current environment is quite favourable. Falling inflation (or even steady low to modest inflation) benefits both businesses and households. Real incomes have a chance to catch up which allows for more spending. Modest declines in interest rates are also good for growth provided they are because inflation is moderating. If rates are being cut because of faltering growth, that is a more hostile investment environment. That is not our expectation, and this should remain a good environment for risk assets.

Enjoy the summer!

Hear more from the Oakglen experts

Our investment team continue to provide topical and informative content for you to digest. Our Chief Investment Officer Jeff Brummette recently gave our June 2024 Investment Summary on market movements from May and upcoming market trends, and our Managing Director Dominic Tayler covered the UK General Election and the economic implications.

Read more:

You can read other articles from the team on our News & Insights page.

Want to become an Oakglen client?

Get in touch with one of our wealth team via the Contact Us page to hear more about our products and services, and how suitable they are for you and your personal circumstances.

Jeff Brummette

Chief Investment Officer

+44 (0) 20 4583 1129

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