Written by Shane Balkham
The Bank of England announced that interest rates would be kept at the current level of 5.25%, but offered respite with assurances that rate cuts were an active part of the policy committees’ discussions. From the committee of seven, two members voted for a cut of 0.25%, a positive move in the right direction. What was more telling was an interview with the Governor of the Bank of England, Andrew Bailey, where he signalled that rate cuts are coming, without actually using those exact words.
Forward guidance is a skill and Andrew Bailey was clever in giving sufficient hints that rate cuts were on the agenda, without being lured into a firm commitment. This has been a consistent message over the past few months and has given the central bank flexibility by not nailing its colours to any particular set of data.
In the US though, the hopes of a rate cut are fading, where the Federal Reserve has tied the decision to cut firmly on data. As commented on last week, one of those data points is the strength of the labour market, and the other is inflation. US inflation has become sticky, so the next data release for US inflation, which is due on Wednesday, will be closely monitored.
As to when we could expect a rate cut from the US, now becomes more complicated with the US Presidential election starting to gather pace. Keen not to be seen as offering any political advantage, the decision to cut could be delayed until after the votes have been counted, making the meeting on the 12th November particularly significant. It now seems as though the US, who were slow to react to rising inflation, will have mirrored this error and has been slow to react to slowing inflation.
Not slow to react is President Biden, who is widely expected to announce new taxes on products from China, specifically on electric vehicles, and solar panels, of which China has a surplus. For electric vehicles (EVs) the import tariff will be raised from 25% to 100%, a clear indication from Biden that protecting America’s industries will be one key area of his election campaigning.
It is a timely reminder of the importance of diversification within portfolios. Relying on a single sector or geographical region can quickly rotate from being beneficial to becoming a hinderance.
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