Interest rates to fall on both sides of the Atlantic amid growing hopes inflation is back under control

Interest rates look set to fall on both sides on the Atlantic amid growing hopes inflation is back under control.

Official figures in the United States yesterday showed that inflation in the world’s biggest economy dipped from 3 per cent to 2.9 per cent in July.

It was the first time inflation has been below 3 per cent since 2021 and, according to analysts, ‘clears the runway’ for the central bank, the US Federal Reserve, to cut rates next month.

The figures came just hours after the Office for National Statistics said inflation in the UK rose less than expected in July – from 2 per cent to just 2.2 per cent.

That fuelled hopes that the Bank of England will press ahead with two more rate cuts this year having reduced them from 5.25 per cent to 5 per cent this month.

Bond yields, a key measure of borrowing costs on financial markets, fell on both sides of the Atlantic with the rate on ten-year UK gilts and ten-year US treasurers dropping towards 3.81 per cent.

According to money markets, there is a 40 per cent chance the next move by the Bank of England will come as soon as September.

While the Bank and European Central Bank have started to cut interest rates again following a series of hikes, the Fed has held its benchmark at between 5.25 per cent and 5.5 per cent for more than a year. 

But while there is some chance of a rate cut in the UK next month, investors believe such a move in the US is nailed on.

In fact, the chances of a half-percentage-point cut are around 60 per cent, though some observers believe a more traditional 0.25 percentage-point move is more likely.

‘Unless the global economy experiences another shock, the Fed will most likely cut rates by a quarter,’ said Jeffrey Roach, chief economist at LPL Financial.

‘The probability of a half-per cent is still elevated since investors are somewhat skittish from recent events.’

Central banks have proved reluctant to cut rates, having been criticised for raising them too slowly as inflation spiralled out of control when Covid lockdowns were lifted and energy prices soared following Russia’s invasion of Ukraine.

Andrew Lilico, a fellow at the Institute of Economic Affairs thinktank, said UK data ‘support the case that the Bank of England has been too slow in cutting rates’.

And Richard Carter, at Quilter Cheviot, said: ‘Today’s US inflation figure clears the runway for the Fed to initiate a rate cut at its September meeting.’

Charles Schwab’s UK managing director Richard Flynn added: ‘This drop reinforces the message recent labour figures have made clear to the Federal Reserve: it’s time for interest rates to fall.’

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