Britain is “bumbling” into the New Year, says Eshe Nelson in The New York Times. Consumers are “downbeat” after “disappointing economic news”. Worries about inflation persist, with the Bank of England (BoE) not expecting a sustainable return to the 2% target until 2027. As a result, the Bank has been cautious, cutting rates by only half a percentage point in 2024, even as US and European central bankers cut borrowing costs by a full point.
UK gilts wobbled earlier this month, says David Smith in The Sunday Times. But a degree of calm returned following news that annual inflation fell last month to 2.5%, around the long-term average, coupled with “encouraging falls in core and service-sector inflation”. That sets up the BoE for another interest rate cut in February. With the economy sluggish, it could be the first of several.
Investors are cautious about pricing in too many rate cuts, says Ollie Smith for Morningstar. Markets were “wrong-footed” last year after only getting two of the six cuts they had expected from “cautious” policymakers. Inflationary pressures remain – not least the yet-to-be-quantified impact of the government’s national insurance hike. But with UK unemployment ticking up, wage pressures should start to ease. Jacob Reynolds of Courtiers UK Equity Income expects four rate cuts this year, taking them down to 3.75%.
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Which investments will outperform if 2025 brings more rate cuts than expected? Housing stocks and utilities are especially rate-sensitive, notes Mark Preskett of Morningstar Investment Management. Small-cap stocks are “attractively valued” on a price-to-earnings basis and should also benefit from lower rates.
Donald Trump and US inflation
Meanwhile, US inflation has risen for three months in a row, hitting 2.9% in December. But US stocks rallied anyway, cheered by signs that core price pressures are easing, says Paul Kiernan in The Wall Street Journal. US inflation is down since the June 2022 peak of 9%, but the descent has been “slow and bumpy”. US central bankers are waiting to see just how inflationary Donald Trump’s plans will be. Tariffs will reduce the supply of goods, and mass deportations would cut the labour supply, both of which raise prices. Republican promises of tax cuts could unleash a new demand surge. The Federal Reserve “isn’t likely to cut rates anytime soon”.
US inflation still looks “too high to permit more rate cuts”, agrees John Authers on Bloomberg. Alarmingly, the University of Michigan consumer survey reports that US consumers expect inflation in five years to be 3.3% – the survey’s highest level since 2008. High inflation expectations can be a self-fulfilling prophecy. Rising prices might “ruin the Trump 2.0 agenda before it starts”.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
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