UK Interest Rates Held as US Rates Fall and Volatility Index Up
Published / Last Updated on 19/12/2024
Today the Bank of England Monetary Policy Committee (MPC) has voted by a majority of 6:3 to hold interest rates at 4.75% pa.
The move was widely anticipated given the Bank of England had already suggested last month it was unlikely to cut rates in December after the 0.25% cut on 7th November. The final ‘nail in the coffin’ on this decision was perhaps the fact the UK CPI inflation increased in November (announced by the Office for National Statistics yesterday).
US Rates
Yesterday, the Federal Reserve did cut interest rates by 0.25% to a range of 4.25%-4.50% (the third rate cut this year) but was ‘hawkish’ in its message meaning the Fed Committee expects that savers will do better i.e., interest rates will come down slower and be less frequent. This prompted a market sell-off for stocks listed on the Dow Jones, the S&P 500 and the NASDAQ.
Comment
The Bank of England is juggling with the fact that the UK economy (measured by GDP) has fallen for two consecutive months, so we are slowing down, but inflation has risen for the last 2 months, currently at 2.6% pa after falling to 1.7% pa in September. Owner/occupier housing costs are the main culprit with costs rising at nearly 8% pa and with interest rates now held and the next Bank of England MPC meeting not due until 6th February 2025, there is little hope of housing costs falling and therefore inflation is likely to remain stubborn although we do expect a rate cut in February.
It may be too late by then to avoid an economic recession and as if to support our view, over in the USA, the Federal Reserve yesterday suggested there will likely be only 2 further rate cuts in 2025 (originally forecast at 4 rate cuts in October). Certainly, the S&P 500 VIX (volatility index) is at -25% today indicating investors are expecting the S&P 500 to be volatile in 2025 but a 25% swing is bigger than we had forecast (we have long forecast a 10% ‘correction’ rather than a market ‘crash’ of over 20%.
Brace yourself for recession in the next 12 months, brace yourself for higher mortgage rates to be maintained (for borrowers) and savers to reap the benefits of sustained higher deposit rates. Brace yourself for a stock market ‘correction’ in the next 6 months.