Rate cuts continue despite turbulence as the US elections and UK budget roil markets
It looks like interest rates will be cut on both sides of the Atlantic this week, despite the uncertainty created by the budget and the US presidential election.
The US Federal Reserve will announce its next monetary policy decision on Thursday, although it could still be uncertain by then whether Donald Trump or Kamala Harris has won.
The Bank of England is also expected to cut rates on the same day – although Labor’s budget could mean interest rates move more slowly in the coming months than previously expected.
Election call: The US Federal Reserve (pictured) will announce its next monetary policy decision on Thursday, although it may still be uncertain whether Donald Trump or Kamala Harris won
Dollar and government bond yields fell yesterday as investors reacted to opinion polls suggesting Harris could have an edge.
The decisions of the Fed and the Bank will be critical for millions of borrowers in both countries.
The Fed’s actions in particular will ripple through international financial markets, particularly through the dollar and U.S. bonds, known as Treasuries, which are seen as the world’s safest assets.
That’s because while both candidates appear poised to add trillions to the national debt with a massive amount of borrowing, it is Trump’s plans that are more wasteful and therefore more inflationary.
Higher inflation means slower rate cuts. And if interest rates stay higher for longer, the dollar will become stronger. Until now, markets had been betting that a Trump victory was more likely.
Kenneth Broux, head of foreign exchange research at bank Societe Generale, said: “The polls suggesting Harris would have her nose ahead in a number of swing states are causing some profit-taking in the Trump trade.”
In Britain, markets have adjusted their expectations about when interest rate cuts will occur as a result of Rachel Reeves’ budget.
It is believed that the Chancellor’s £162 billion in borrowing and associated spending will increase inflationary pressures, something that would slow the path of rate cuts.
Inflation has been at or around the 2 percent target since the spring and fell to 1.7 percent in September, the lowest level in three and a half years.
The fall in inflation allowed the Bank to cut interest rates from 5.25 percent to 5 percent in August, although they held steady in September. Economists expect a further reduction this week.
But after the budget, traders are no longer betting on a cut before Christmas in December – and are planning the next one in February.
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