BoE governor predicts UK interest rates will fall gradually
Newsflash: The governor of the Bank of England has predicted that interest rates will fall “gradually”.
In an interview with KentOnline, just published, Andrew Bailey said that “inflation has come down a long way” – it was 2.2% in August, just above the BoE’s target, having fallen from over 11% in autumn 2022.
Last week, the Bank left interest rates on hold at 5% – but Bailey says he is “very encouraged” that inflation will fall, leading to lower borrowing costs.
He says:
“We still have to get it sustainably at the target and we have quite an unbalanced mix of components of inflation at the moment. But I’m very encouraged that the path is downwards therefore I do think the path for interest rates will be downwards, gradually.”
Photograph: Bank of England
Bailey also cautions that interest rates are unlikely to fall back to the record low (just 0.1%) we saw in the Covid-19 pandemic, before the inflation shock of the Ukraine war.
He told KentOnline:
“Where it will settle is a good question. Simple answer is I can’t tell you with any great accuracy. What I would say is ‘will we go back to the very low near zero interest rates that we had until not that long ago’?
“My answer is I would not expect that because what caused interest rates to go that way it was, amongst other things, two very big shocks to the economy.
The financial markets predict UK interest rates could fall to 4.5% by the end of this year, and to 3.5% or lower by the end of 2025.
Key events
China’s shares surge after stimulus measures announced
Investors across Asia-Pacific markets have welcomed China’s stimulus measures.
Stocks have surged in Shanghia and Shenzen, driving the CSI300 index up by 3.7% today.
China’s authorities have “set a fire” underneath the country’s equity markets, says Kyle Rodda, senior financial market analyst at Capital.com.
Chinese authorities have set a fire underneath their markets with a raft of new measures to support their financial system and asset prices. Those looking for more direct support to households and fiscal stimulus will be left disappointed by the initiatives.
However, for investors fearful about systemic instability, scarce liquidity and asset price deflation, the policies announced today provide reason for greater optimism about Chinese markets.
While cuts to reverse repo rates and reserve requirements will grease liquidity, the most remarkable move is allowing brokers and funds to tap the PBOC for cash to buy stock
Pound hits two and a half-year high
The pound has hit its highest level in over two years this morning, as investors bet that the Bank of England will cut interest rates slower than the US Federal Reserve.
Sterling has extended its recent rally this morning, hitting $1.3366 for the first time since March 2022.
The pound is strengthening after the Bank of England left interest rates on hold last week, and said borrowing costs must not fall “too fast or by too much”.
That caution contrasts with the Fed, which slashed US rates by half a percentage point last Wednesday.
The markets now expect the Fed to cut rates by another three-quarters of a percent by the end of this year. The Bank of England is only expected to cut by up to half a percent.
The pound has also hit its highest level against the euro in over two years, rising over €1.20. That followed economic data which suggested Germany was sliding into recession, as its manufacturing sector continued to contract.
Introduction: China launches stimulus measures to revive economy
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
China’s central bank has launched a blitz of stimulus measures to support its economy, as policymakers strive to hit Beijing’s growth targets.
Faced with a spluttering economy. the People’s Bank of China has pulled out its bazooka.
First, it is cutting the amount of cash banks must hold on their books (known as the reserve requirements ratio) by half a percentage point (50 basis points). That should free up more money to be lent to customers.
Second, it is lowering several key interest rates. The seven-day repo rate, PBoC’s new benchmark, by 0.2 percentage points to 1.5%. The interest rate on the medium-term lending facility will drop by about 30 basis points, and loan prime rates by 20-25 bps.
Third, there’s more support for the property market. PBoC says it will encourage commercial banks to lower existing mortgage interest rates, which will cut costs for both current and new borrowers.
It is also lowering the down-payment requirements for both first and second homes – to help people get onto the property ladder, and keep sales moving.
Fourthly, PBoC governor Pan Gongsheng announced the central bank will create new monetary policy tools to support the sstable development of the stock market.
All in all – a wide-ranging push, which has pushed shares higher on the Chinese stock exchange.
The package follows signs that China’s economy has been faltering in 2024. Growth slowed to 4.7% year-on-year in the second quarter of the year, down from 5.3% in Q1 – putting Beijing’s 5% growth target at risk.
In July, China’s export growth missed forecasts, and in August manufacturing activity sank to a six-month low.
Economists are sceptical, though, that PBoC’s measures alone will be enough.
Capital Economics analyst Julian Evans-Pritchard says:
“This is the most significant PBOC stimulus package since the early days of the pandemic.
But on its own, it may not be enough.”
The agenda
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9am BST: IFO survey of German business confidence
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2pm BST: Case-Shiller index of US house prices for July
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3pm BST: US consumer confidence report for August