On the potential for UK interest rates to fall, Rupert Thompson, chief economist at Iboss, says: “Here in the UK, BoE governor Andrew Bailey has professed confidence that inflation is coming under control in line with its forecasts, even though it did not fall as much in March as had been hoped.
"While the headline and core rates did slow to 3.2 per cent and 4.2 per cent respectively, domestically generated inflation pressures remained elevated with services inflation still running at 6.0 per cent. Wage growth also came in higher than expected in February, with average earnings excluding bonuses up 6.0 per cent on a year earlier.
"Yet at the same time, signs of a significant softening in the labour market are now emerging. Employment is falling and the unemployment rate rose to 4.2 per cent from 3.9 per cent. This weakening, along with the marked fall in inflation from last year’s highs, should ensure wage growth continues to moderate slowly.
"Still, while headline inflation remains on track to dip temporarily below the BoE’s 2 per cent target over the next couple of months, core inflation looks set to remain closer to 3 per cent.
"Most likely, the BoE will start cutting rates over the summer, if not as soon as June when the European Central Bank looks set to begin.”
Market movements
The area of the market where movements in rates and rate expectations would expect to be most acutely felt is in the bond market.
The asset class rallied strongly in the final quarter of 2023 as investors began to price in rate cuts, but that has revised more recently.
Miller’s view is that bond prices will likely stay within a narrow range – that is, not be particularly volatile – because at present yields are not sufficiently high to be impacted starkly by an inflation shock, nor sufficiently low to be impacted by a growth shock.
He notes that recent geopolitical events did not precipitate investors rushing into bonds as a safe haven – the normal reaction to uncertainty – and he says this demonstrates that yields are not particularly high.
Thompson is slightly more optimistic about the prospect for bonds, noting that yields have moved sharply since the start of 2024, with the US 10-year government bond yield having risen by about 80 basis points since the start of the year, whereas he felt that equity valuations did not move to reflect the changed reality of revised interest rate expectations of recent months.
He says: “This month, however, equities have suffered along with bonds. In part, this is simply because global equities were ripe for a correction, having seen no meaningful set-back during the 24 per cent run-up in prices since the end of October. But it is clearly also partly a response to the escalation of the conflict in the Middle East.
