With inflation fading and the pace of economic growth slowing around the world, the major central banks are closing in on the end of their interest rate hiking cycles.
The pound fell to its lowest since March 2023, while UK share prices rallied after the Bank of England kept interest rates steady. The Bank held rates at 5.25% despite expectations of a hike, bringing relief to mortgage holders.
Cooling food prices helped drive an unexpected drop in UK inflation in August, marking the sixth straight decline in the headline rate. Inflation fell to 6.7% from 6.8% in July, suggesting the Bank’s policies are taking effect. The core inflation rate – which strips out volatile food and energy prices – fell from 6.9% in July to 6.2% in August.
With growing evidence inflation is fading, the case for further rate hikes is diminishing. However, pressure still remains on households with food inflation increasing by 13.6% in August, which although lower than the peak of 19.1% earlier this year is still high by historical standards.
Despite a slowing job market, UK wages are rising faster than prices. Unemployment rose by 159,000 last quarter, lifting those out of work to 1.5 million. Annual pay growth, excluding bonuses, held at 7.8% – the fastest since comparable records began in 2001.
US interest rate remains unchanged
Stocks and bonds struggled in September as the US Federal Reserve (Fed) signalled interest rates would stay higher for longer. After a two-day meeting, the Fed kept its federal funds rate in the range of 5.25% to 5.5% for the second straight time this year. But officials suggested rates could still rise further to 5.5 to 5.75% by year-end.
The Fed has been raising interest rates at their fastest pace since the 1980s in an effort to bring down inflation. So far, rates have gone up 11 times from near zero since March 2022.
Big central banks are close to the end of the most aggressive ratehiking cycle in decades after inflation surged in the wake of the Covid-19 pandemic and Russia’s invasion of Ukraine.
The Fed’s position comes as inflation accelerated again in August. Consumer prices jumped 3.7% from a year ago, up from 3.2% in July, mainly due to surging energy costs. However, core inflation fell to 4.3% from 4.7% for the 12 months ending in August, which is its slowest pace since September 2021.
While inflation has dropped significantly from its peak last year, rising consumer prices highlight the challenges central bank officials face in trying to stabilise prices. Nearly 18 months of rate hikes seem to be cooling the job market finally. The unemployment rate ticked up to 3.8% in August from 3.5% in July. Employers added 187,000 jobs, up from 157,000 in July, while average hourly earnings growth slowed to 0.2% from 0.4% the previous month.
ECB hikes rates
European shares climbed higher after the European Central Bank (ECB) hinted its latest interest rate increase may be its last for now. The ECB continued battling stubborn inflation by lifting its key rate for the tenth consecutive time to 4% from 3.75%.
Higher borrowing costs are weighing on decisions by consumers and businesses to invest and spend and there are fears that rate hikes could push the economy into recession.
In a positive sign, inflation across the euro area eased to 5.2% in August from 5.3% the prior month. Inflation in the 20 countries that make up the single-currency region has halved since it hit a record 10.6% in October 2022, when the effects of Russia’s war in Ukraine on gas and oil prices were at their height.
However, the region’s economic outlook remains uncertain. Activity contracted in August across major euro area economies like Germany, France, Italy and Spain in the services sector, despite a busy summer tourism season. This adds to the global manufacturing slowdown that has especially impacted export reliant Germany.
China’s economy stabilises
Asian markets rose as data showed China’s struggling economy may be stabilising. Retail sales rebounded in August with 4.6% growth, up from 2.5% in July. Industrial output also picked up to 4.5% from 3.7%, signalling the world’s second-largest economy could be emerging from its post-pandemic doldrums.
Consumer prices bounced back in August following worrisome deflation the previous month.
Despite a flurry of recent support measures, the slump in China’s property sector worsened in August, with deepening falls in new home prices, property investment and sales.
This year has brought a stream of bad news for China, with growth slowing amid a fall in consumer spending and weakening global demand. Youth unemployment has hit record levels, foreign investment has fallen, exports are weak and the property sector is in crisis.
With the recovery faltering, China has cut its benchmark lending rate in a bid to stimulate the economy and ramp up demand.