Britain is Beating the US in the Fight Against Inflation and Could Cut Interest Rates Sooner - Latest Global News

Britain is Beating the US in the Fight Against Inflation and Could Cut Interest Rates Sooner

Britain is starting to curb inflation faster than the U.S., underscoring a divergence between the two economies that could allow the Bank of England to cut interest rates sooner than the Federal Reserve.

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(Bloomberg) — Britain is starting to curb inflation faster than the U.S., underscoring a divergence between the two economies that could allow the Bank of England to cut interest rates sooner than the Federal Reserve.

Official figures due to be released in the UK this week are expected to show the consumer price index fell further in March while unemployment rose as the country begins to shake off a recession, a survey of economists shows. In contrast, the US just reported an unexpected rise in inflation and a falling unemployment rate as the economy strengthened.

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The results represent a major shift as investors are now increasingly betting that Britain’s central bank could lead a global move toward lower borrowing costs later this year, rather than lagging behind competitors. While they pushed back the expected date for the first US interest rate cut to September, markets are now almost fully pricing in a UK cut in August.

“UK inflation has surprised to the downside over the last two prints and we believe this momentum can continue,” said Megum Muhic, strategist at RBC Capital Markets.

Still, traders are wary of pushing too hard the idea of ​​an immediate cut in BOE rates. Officials including Catherine Mann, Jonathan Haskel and Megan Greene have signaled ongoing concerns about inflation pressures. And the Fed’s market dominance also gives cause for hesitation.

Money markets have been changing over the last few weeks on the outlook for the UK. Last week they reduced bets on aggressive rate cuts due to comments from policymakers and higher-than-expected inflation in the US.

Still, some analysts are beginning to argue that the BOE’s position has changed, that inflation is likely to fall back to the 2% target and that there is a credible path for a rate cut in the coming months.

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“The BOE can resist the Fed’s pull,” Dan Hanson and Ana Andrade of Bloomberg Economics wrote in a note on Monday. “Different inflation dynamics, the BOE’s track record and limited exchange rate effects mean the Fed will not stand in the way of the UK central bank cutting interest rates as early as June, and by more than markets expected.”

The gap in interest rate policies is expected to be a central theme at the International Monetary Fund’s spring meetings in Washington this week.

Both British Finance Minister Jeremy Hunt and BOE Governor Andrew Bailey will be in Washington when the Office for National Statistics releases UK inflation and wages data. The reports are expected to show the following, based on Friday’s survey results:

  • UK inflation fell slightly for the second month in a row to 3.1% in March, compared to 3.4% the previous month.
  • Unemployment rose to 4% in the quarter ended February from 3.9% in the previous period, the second straight month or so of rising unemployment.
  • Regular wage growth slowed to 5.8% from 6.1% over the same period.

In the USA, however, inflation has risen to 3.5% in the last two months. The UK’s headline inflation rate is now lower than the US for the first time since March 2022, and the BOE expects it to fall below the 2% target in April.

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Hanson and Andrade said the US, where GDP growth is surging, is not currently the right barometer “for this side of the Atlantic, particularly for the UK”. They pointed to a number of factors.

  • The UK is recovering from a mild technical recession and demand remains relatively weak compared to the US.
  • Falling energy prices will reduce inflation. As lower gas prices impact household bills, inflation will fall to or below 2% “for much of this year.” The US did not suffer the same energy price shock and therefore will not benefit from the reversal of falling prices.
  • Lower headline inflation will lower core inflation, eliminating volatile food and energy. Core inflation is higher than the U.S. and remains a concern for the BOE, but falling headline rates “should impact wages and underlying price pressures over time.”
  • The BOE has deviated from the Fed in the past. It did not follow the Fed’s rate cuts in the early 2000s or its rate hikes after 2016. It also raised rates before the Fed in 2021 as inflation picked up.

The BOE has also argued that monetary policy will remain restrictive, meaning it will continue to depress inflation even as it cuts interest rates. Bailey has two big speeches in Washington where he could change that mood.

“The big difference is that the UK economy is not as strong as the US and activity is picking up from a weaker starting point,” said Ruth Gregory of Capital Economics. Both the UK’s core and services measures of the CPI “are encouraging that a downward trend in inflation is still underway.”

– With assistance from Andrew Atkinson.

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