Under-pressure rate setters on both sides of Atlantic hold the line
Central banks on both sides of the Atlantic will set the course for the direction of interest rates this week as Donald Trump's trade war looms over the global economy.
Both the US Federal Reserve and the Bank of England are expected to leave rates on hold when they announce their latest policy decisions on Wednesday and Thursday, but could give clues about the pace of rate cuts to come.
Pressure is mounting for Fed chief Jerome Powell and Bank governor Andrew Bailey to act. In the UK, fears that a bright start to the year for the economy could falter are rising after figures last week showed gross domestic product shrank by 0.3 per cent in April, partly blamed on the impact of tariffs as well as Labour's decision to hike employer National Insurance Contributions.
Meanwhile, figures showed the UK has lost a quarter of million jobs since autumn's Budget.
Bailey recently told MPs that he is sticking to a 'careful' approach to interest rates for now but will act 'aggressively' if needed in the face of global uncertainty. That has helped stoke hopes of a rate cut later this summer. Those hopes could be further lifted if official figures this Wednesday, a day before the Bank's rate decision, show inflation easing as expected.
Thomas Pugh, of accountancy firm RSM, said it was a 'sure bet' that the Bank will keep rates on hold at 4.25 per cent on Thursday. But he added: 'Looking ahead, the deterioration in the labour market, weaker economic growth along with inflation... should give the Bank all the cover it needs to cut rates again in August.'
In the US, Powell faces a different kind of pressure. While jobs growth has slowed, tariffs have yet to produce a severe impact on economic data, with inflation remaining mild. That has left markets betting that the Fed will continue its 'wait and see' policy on how to respond to the impact of Trump's erratic policy making.
But Powell's inaction has displeased the President, with Trump calling Powell a 'numbskull' as he demanded a rate cut.
Michael Krautzberger, head of public markets at AllianzGI, said Fed comments 'have highlighted a reluctance to change the policy stance in the near term'.
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