The UK and the USA are natural allies, but even with the same 2% inflation rate objective, divergent paths might be taken by their respective Central Banks. UK’s consumer prices index (CPI) rose by 2.3% in April 2024, down from 3.2% in March 2024. Lower inflation rate was mainly supported by falling electricity, gas and food prices. The Bank of England is expected to start cutting interest rates from August this year, before the US Federal Reserve takes the plunge.
The European Central Bank (ECB) also seems to be on the same page and ready to cut rates. Inflation rate stood at 2.4% in April 2024 in the Euro area. The ECB was the last central bank to raise rates to tame inflation two years ago. ECB had raised its interest rates by 50 basis points (bps) in July 2022 after a decade as inflation moved beyond 8%. But will it be the first one to cut interest rates in the upcoming June 6, 2024 meeting. Europe is another natural ally of the US and UK with a similar inflation objective of 2%. But by increasing interest rates, are both UK and Europe ready for depreciation of their respective currencies, and increase the cost of imports, stoking inflation. Thus, it’s a tough decision to move on a path divergent to the US economy.
Inflation in the US has slowed down to 3.4% in April from 3.5% in March 2024 and 4.9%, a year ago. Consumer price index (CPI) has travelled a lot of distance from a high of 9.1% in June 2022. The US Federal Reserve held its interest rates at 5.25-5.5%, at a two-decade high in May 2024.
In the recently released minutes of the US Fed FOMC Committee meeting, members agreed that to reduce interest rates, greater confidence needs to be gained about inflation getting closer to 2%. And in case there are risks which impede fulfilling 2% US Fed inflation target, monetary stance might be adjusted or in other words, tightening or increase in interest rates is not ruled out. This led to nearly 1% fall in crude oil prices as probability of higher interest rates dampen economic growth and oil demand. Organization of petroleum exporting countries (Opec) meeting on June 2, 2024 will be keenly watched by investors. Though Brent Crude is steady at $82 levels, will there be another round of output cuts.
