Yesterday we saw the Bank of Canada cut their interest rates by 25 basis points for a second consecutive month, bringing their policy rate down to 4.50% in line with expectations. The central bank also revised down its growth forecast for 2024 due to a decrease in consumption for motor vehicles and foreign travel, as well as households drawing back on their spending and instead allocating a larger portion of their income to debt payments. Overall, it’s expected that inflation will fall below core inflation through the latter part of 2024 because of gas price performance.
This morning we’ve seen GBP fall back against a basket of currencies this morning as a combination of weak earnings across The UK and The U.S as well as a string of poor data releases has led to investors exiting positions on the stock market and flocking to be renowned safe havens, such as the USD, CHF & Yen. All attention will now turn to U.S inflation figures set to be released tomorrow afternoon with current projections showing another slight drop towards 2.4%. As showed last month, if inflation in The U.S does fall naturally again it wouldn’t be a shock to see USD strength as it may back up The Federal Reserve’s argument that interest rate cuts aren’t quite needed just yet. Either way it’s another key piece of economic data to be released and as ever, any outcome that deviates away from projections may cause some volatility to the markets.
This moves us nicely onto The Bank of England’s interest rate decision next Thursday. The Bank of England have been reluctant to cut interest rates too soon in their view, and financial markets deem these as close a call as possible with a current 45% chance that the central bank reduces rates to 5%. Although the central bank have been keen to keep rates at their current 16-year high, there are 3 main reasons why there is belief next week will be the beginning what will be a slow and steady path to reduction; Firstly, June headline inflation is at 2% which is exactly in line with projections, secondly the overshoot in Services inflation is expected to have been largely caused by volatile and regulated components which isn’t believed to have a major impact on the outlook. And finally, the jobs market report showed further signs of a slowdown, in particular with wage growth in the private sector easing slightly. None of the above guarantees a rate cut next Thursday but it definitely shouldn’t be ruled out.