So, UK inflation springing in a rather pleasant surprise, but still above the central bank’s target. Now, is this looking like the glass half full and what has really contributed to this surprise drop?
Yes, we are starting to see major economies seeing inflation drop down. We are seeing that UK inflation has finally moved away from the 8% area and finally went to the 7.9%, which is good news for the UK because the economy was in fact really slowing down. Inflation was really high in the past period. So, I think it is really good news for the economy. Also saw the FTSE 100 surged more than 2% .
So, we are seeing some positive market reaction to the news. Despite that, we are still well above the Fed’s target, like you said.
But I think that now we are pricing in more rate hikes from the Bank of England to curb inflation because after all the target is still 2% and we have a long way to go.
So, yes, the outlook still remains dim for the UK as we see that the effect on the economy is actually slowing down and what is contributing to that is the economic indicators that we are seeing like retail sales or industrial production and so forth.
All these economic indicators do reflect a slowing down economy and we have already seen that also the eurozone has been in a recession with two quarters of contraction and we are seeing a lot of let us say the economic indicators also reflecting a slowdown in the economy and a recession.
So, it is not so much a soft landing for the UK or the eurozone while in the US we can say otherwise. However, now that is what markets are focussed on.
I want to also talk about the rate hiking cycle which might slow down looking at these numbers. There might be some softening as far as the rate hike decision goes and yet in the context of the markets it has made all the difference, although the difference between the inflation print that has come out now and what was expected there is not much difference but that difference could be a real game changer for markets because earlier this month the markets were forecasting that the Bank of England would put the UK’s key interest rate up to 6.5% but now markets are thinking that the Bank of England rate hike will peak at less than 6% and that seems like a big shift. What do you think?Yes, of course, from going down from 6%, it would be so much better for the economy to grow to see substantial growth in the economy after the slowdown period that we are seeing right now.
We are seeing a lot of stocks recover. We are going through a partial recovery period actually for markets right now as we see inflation actually cooling down, economic indicators like retail sales also cooling off.
We are seeing because of summer season so obviously a lot of that money is going to travel and so on and less on sales and that is why we are seeing a little bit of a shift in the economy right now.
We are also seeing as inflation cools down, which was the biggest fight in 2023, and that is why the stock market was doing bad at the start but now we are seeing a kind of recovery period.
So, I think this is why this happens to be a big shift and for the Bank of England to take a step lower from the 6% it is definitely going to boost the economy a little bit at least so that we do not see a very dim outlook for the UK.
So not all a dimmed outlook, but whether this is indeed a watershed moment for the US market that remains to be seen. PM Rishi Sunak has also set a target of reducing inflation to 5% by the end of 2023. But looking at the monetary policy, do you think that is a challenging target or something that can be met?
I think that can be met. I mean, we are already seen if we look at the US economy where we are right now at levels of 4%, I think that hiking interest rates have a really good effect and strong effect on slowing down inflation.
It is actually one of the only tools available for central banks to use and that is why they go back and they hike rates every now and then and this is the tool that they went through basically.