Stock markets around the world have risen amid hopes of interest rate cuts later in the year.
UK share prices rose to nearly their highest level in a year after the Bank of England held interest rates at 5.25% for the fifth month in a row and said the economy is moving in the right direction for a reduction. Inflation dropped to 3.4% in February, the lowest it’s been in two and a half years, fuelling expectations the Bank will lower interest rates in the summer.
The main reason for the fall was a decrease in food inflation, which dipped from 6.5% to 5%. The central bank has said it will not cut interest rates until the inflation rate has fallen to 2%. Core inflation, which excludes food and energy, fell to 4.5% from 5.1% previously.
Chancellor Jeremy Hunt unveiled his Spring Budget, which included some cuts and freezes on duty taxes. Among the changes, there’s a 2p reduction in National Insurance, a new tax on vaping, and an increase in the salary threshold for claiming child benefit. However, soaring UK government debt and a lacklustre economy left the chancellor with little room for further substantial giveaways.
The economy started growing again in January after it had slipped into a recession at the end of last year. In January, GDP went up by 0.2%, suggesting that if this trend continues through to March, the recession might end up being the shortest one ever recorded in the UK. However, there are also signs that the job market is cooling, with the unemployment rate slightly rising to 3.9%.
Lower mortgage rates and falling inflation have increased buyer confidence in the residential property market. House prices went up by 1.5% in March, the biggest price rise for 10 months, according to Rightmove.
US shares hit all-time highs
US share prices soared to record highs after the Federal Reserve (Fed) indicated that it expects to deliver interest rate cuts later in the year. The Fed held rates once again in a range between 5.25% and 5.5%, the highest in more than 20 years, and suggested it still expects to cut rates three times this year.
US inflation unexpectedly ticked up to 3.2% in February, highlighting the difficulty the Fed is having keeping prices from rising too quickly. Even though inflation is close to the 2% target, the economy is still doing better than expected.
Inflation has slowed significantly since the Fed started hiking borrowing costs sharply in 2022 and the bank is expected to reverse course once inflation is under control. Markets expect three or four cuts this year, beginning in the summer.
The US economy remains robust in the face of high interest rates, raising hopes of a soft landing – where recession is avoided. Employers hired 275,000 new workers in February, as the job market continues growing. Surprisingly, the unemployment rate went up to 3.9% from 3.7% in January. Retail sales rebounded in February, up by 0.6% after dropping 1.1% in January, partly because of bad winter weather.
Interest rates unchanged in Europe
The European Central Bank (ECB) left its key interest rate unchanged at a 22-year high of 4.5% for the fourth time in a row. Despite the easing of most measures of underlying inflation, persistent domestic price pressures persist, partly due to robust wage growth. The central bank has held borrowing costs at record highs since September and has so far ignored calls for a rate cut.
Annual inflation across the euro area eased to 2.6% in February, but it remains above the ECB’s target of 2%. Prices spiked after Russia cut off supplies of natural gas to Europe, sending energy prices soaring, and trade bottlenecks resulting from the post-pandemic rebound added to inflationary pressures.
While these factors have now eased, growth has been flat due to the lingering effects of the energy price shock and higher interest rates. The region's economy has been stagnant since late 2022 and narrowly avoided a recession at the end of last year. Things are now looking up though, with business activity close to stabilising, according to the latest surveys.
China’s outlook brightens
China’s economy is showing signs of improvement, but the housing market remains under pressure. Manufacturing activity and investment picked up at the start of the year in a boost for policymakers grappling with a slowing economy.
Industrial output rose by 7% in January to February from last year, while spending on factories and equipment, known as fixed asset investments, was up 4.2%. Retail sales were also boosted by strong activity during the Lunar New Year holiday in February, going up 5.5%.
However, China’s economy faces significant challenges, such as deflationary pressures, subdued consumer confidence, and financial strains among major property developers. The property sector, in particular, remains sluggish due to high levels of debt despite a flurry of government measures to boost the industry.
Investment in real estate fell 9% between January and February compared with the same period a year earlier. Consumer prices have risen for the first time in six months, but it is still too soon to say whether deflation is over. The country’s consumer price index rose by 0.7% year-on-year, largely due to spending related to the Lunar New Year celebrations. In January, the index fell by the fastest rate in 15 years.