UK May Act Preemptively as Central Bank Policy Shift Draws Attention
Amidst lackluster global growth and persistent inflationary pressures, the Bank of England is about to hold a policy meeting. The market widely anticipates that it will become the first G7 central bank to restart a rate-cutting cycle. Trading data shows that there is a 96% probability of a rate cut this Thursday, which, if realized, would be the first monetary policy adjustment in the UK since May 2024.
The potential rate cut is expected to be 25 basis points, bringing the benchmark rate down to 4%. This move not only responds to the UK's prolonged economic downturn but could also signal other major central banks, particularly the Federal Reserve.
Federal Reserve's Softer Stance Leads to Market Pricing in Easing Path
Echoing the UK policy direction, the Federal Reserve's internal stance is also increasingly dovish. Weak U.S. service sector data in July, along with a slowdown in nonfarm job growth, has strengthened expectations of an economic "cooling."
CME FedWatch data indicates that the market currently sees a nearly 91% chance of the Federal Reserve lowering rates by 25 basis points in September, with the possibility of a cumulative 75 basis points rate cut over the year rising rapidly. Wall Street widely speculates that if the UK initiates an easing cycle first, the Federal Reserve might follow suit next month.
Data Supports UK Rate Cut Expectations, Inflation Still a Challenge
Domestic economic data in the UK partially supports a rate cut. In May this year, GDP recorded its second consecutive month of negative growth, and the unemployment rate rose to 4.7%. This indicates that both household spending and business investment confidence are suppressed, providing leeway for a policy shift.
However, inflation remains a significant hurdle. The UK CPI reached 3.6% in June, far above the central bank's 2% target, suggesting that if the UK starts easing, it must carefully balance stimulating the economy and controlling inflation. This "dilemma" mirrors the situation facing the Federal Reserve, placing global policymakers in a state of high uncertainty.
Positive Market Sentiment as UK and US Stock Markets Diverge
Despite poor economic data, market sentiment is quite optimistic. The UK stock market has risen by 12% since the beginning of the year, partly benefiting from plans to boost defense spending and a new trade agreement between the UK and US. The agreement reduces tariffs on American goods to 10%, much lower than previous market expectations, boosting investor confidence.
In the US, the S&P 500 Index has risen by about 7% year-to-date, indicating a strong market expectation for a rate-cutting cycle. Analysts point out that lower interest rates not only help alleviate corporate financing costs but may also support technology sector valuations to some extent.
Global Central Banks Might Experience Policy Resonance, Risks Must Not Be Overlooked
As the UK and US gradually move towards policy shifts, other major central banks might face pressure to follow suit. The European Central Bank, Bank of Japan, and emerging market nations will have to weigh their own macroeconomic environments against the external policy transmission effects.
However, some economists warn that cutting rates too quickly or aggressively might lead to an inflation rebound or even asset bubbles. The current macroeconomic environment requires careful consideration of policy outcomes, as each rate decision will have profound impacts on the global financial market.
