After the Bank of Japan hiked interest rates this week, while the Bank of England, the US Federal Reserve and the Reserve Bank of Australia kept them on hold, investment managers discuss the impact and potential rate cuts or hikes.
The Bank of Japan hiked interest rates this week, as expected,
while the Bank of England, the US Federal Reserve and the Reserve
Bank of Australia kept them on hold.
Looking at the Bank of England’s decision to hold interest rates
at 3.75 per cent, Andrew Wishart, senior UK economist at
Germany’s Berenberg, said the recent news, data and the Monetary
Policy Committee (MPC) response to it suggest that, in the
absence of further shocks, the Bank of England (BoE) will resume
rate cuts by year end.
“Both the scale and duration of the Iran shock look set to be far
smaller than the BoE expected just six weeks ago,” he said.
“While the MPC will likely remain split, we think that enough
members are relaxed enough about inflation and worried enough
about the labour market to deliver a cut by year end. Expect
dovish members to start to vote for a rate cut soon. We think
that a quintet of Bailey, Sarah Breeden, Swati Dhingra, Dave
Ramsden and Alan Taylor will join forces to create a majority for
a reduction in bank rate to 3.50 per cent by year end.”
The US Federal Reserve also held US interest rates between 3.5
per cent and 3.75 per cent this week, after Kevin Warsh’s first
meeting, with governors split on the decision. The Reserve Bank
of Australia kept them on hold while the Bank of Japan hiked
interest rates to a level unseen in 30 years from 0.75 per cent
to 1 per cent, aiming to normalise monetary policy.
Wishart was among a number of strategists and economists who
commented on central bank announcements and decisions. Here are
other reactions.
Bank of England
Lale Akoner, global market strategist, eToro
“The Bank of England’s decision to leave rates unchanged
reinforces the view that policymakers are in no rush to tighten
further, despite inflation remaining above target. Recent
inflation and wage data have come in softer than expected, giving
the Bank more time to assess how the economy responds to already
high borrowing costs. However, higher business costs and
resilient wage growth could keep inflation elevated, leaving the
door open to rate increases if price pressures prove more
persistent than expected.
“For investors, a period of stable rates is generally supportive
for interest rate-sensitive sectors such as housebuilders, real
estate and consumer-focused stocks. It also provides greater
certainty for households and businesses after a prolonged period
of policy tightening. However, with inflation still expected to
remain above target into next year, the risk of another rate
increase has not disappeared entirely. The bigger story is the
growing gap between the BoE and its peers. While the Federal
Reserve remains focused on inflation risks and the European
Central Bank recently raised rates, the BoE is taking a more
cautious approach. That could keep pressure on sterling and leave
UK markets increasingly influenced by developments in the US
rather than domestic monetary policy.”
Alexandra Loydon, group advice director at St James’s
Place
“The Bank of England’s decision to hold interest rates at 3.75
per cent comes as little surprise, particularly after yesterday’s
news that inflation remained at 2.8 per cent in May. The recent
US-Iran truce and subsequent easing in energy prices may have
taken some pressure off the bank to raise rates further, but with
inflation still above the Bank’s 2 per cent target and borrowing
costs still high, households across the UK are likely to continue
to feel the squeeze. In times like this, building a financial
plan is a wise decision, with our research showing that 72 per
cent of those with a plan feel more confident about their
financial position, compared to 51 per cent of those without one.
It’s also worth thinking about how different parts of your money
are working for you. Cash savings remain important for short-term
needs, but for those with longer-term goals, investing through a
well-diversified approach can help individuals position
themselves in the best way possible way and prevent inflation
from eroding cash savings over the long term.”
Michael Browne, global investment strategist, Franklin
Templeton Institute
“In the current environment, where positive and negative data
points are broadly balanced, it is understandable that the MPC
has chosen to sit on their hands and hold rates steady. Inflation
is likely to rise into July following the next domestic energy
price cap reset, as the effects of the Iran will not yet be
evident by then. The real test comes in September: will there be
evidence of second-round effects? Will the autumn wage round -
across public and private sector – prove sufficiently restrained
to keep longer-term inflationary risk in check? By autumn, the
data should provide clearer answers, and the MPC’s decision to
hold may well be vindicated. Until then, both the MPC and the
markets will be left to wait and watch.”
Isabel Albarran, investment officer at Trinity
Bridge
“While domestic activity has arguably been stronger than
anticipated, May’s inflation print suggests that pass-through
from higher energy prices has been less pronounced than expected.
Coupled with the recent agreement between the US and Iran and a
shift lower in energy prices, this alleviates some of the
pressure to hike rates. This is all welcome news for bond holders
globally, but the gilt market may continue to come under pressure
for reasons closer to home, as attention shifts from the Strait
of Hormuz to Makerfield.”
Luke Bartholomew, deputy chief economist,
Aberdeen
“The two votes for a hike show there are some policymakers still
concerned about underlying inflation pressures. But with the
recent fall in energy prices and the softer inflation data,
events are evolving in line with, or potentially even better,
than the Bank’s scenario A from the last meeting, which was
consistent with keeping rates on hold this year. And this is
likely what is influencing most members of the Monetary Policy
Committee. Certainly, inflation has higher to move yet after the
upcoming increase in the energy price cap. But the conditions
don’t seem in place for sustained inflationary pressure. So we
think the BoE will be able to avoid the kind of monetary
tightening that the European Central Bank has already started to
deliver and that the Fed hinted at last night. In fact, if energy
prices continue to moderate then the debate could once again turn
again to rate cuts, but that might have to wait until next year.”
George Brown, senior economist, Schroders
“For now, the Bank is playing for time rather than going on the
attack. Rising inflation expectations have earned a yellow card
from a couple of hawkish dissenters, but the majority are content
to wait. We think the bar for hikes remains high. A softer labour
market and weak growth should help limit second-round effects,
and progress on reopening the Strait of Hormuz should also reduce
some of the more extreme upside risks to energy prices. But the
bank cannot afford to be complacent. If inflation expectations
continue to drift higher, it may yet be forced to step in.”
US Federal Reserve
Paolo Zanghieri, senior economist at Generali
Investments
“A divided Federal Open Market Committee (FOMC) now sees a rate
hike this year. The Fed appears more concerned than expected
about high and sticky inflation. Its much shorter statement
dropped forward guidance and stuck to the facts. New chair Kevin
Warsh held back his own projections and offered little economic
analysis in the Q&A. Instead, he began to set out his vision
for the Fed: a central bank with a narrower remit, a wider lens,
and a stronger focus on financial-market signals. Five task
forces will review how the Fed communicates, manages its balance
sheet, uses data, assesses productivity, and analyses inflation.
They are expected to complete their work by year-end. Our
baseline has no Fed rate moves this year or next. Markets pushed
the two-year Treasury yield to 4.2 per cent, its highest level in
more than a year.
Jon Butcher, senior US economist, Aberdeen
“The Fed funds target rate was left unchanged.Communication
around the decisions was significantly reduced relative to
previous meetings, with the FOMC statement shortened and all
forward guidance removed. The only indication of future policy
direction was the dot plot. This showed half of FOMC members now
expect at least one hike in 2026, with the median dot sitting
between a hike and hold. However, it is not clear whether the dot
submissions were done before or after the announced deal between
US and Iran. Chair Warsh announced a series of task forces to
review Fed operations in a number of areas, including
communications and the balance sheet.
“Reform aside, Warsh’s focus seems to be on getting inflation
back towards the Fed’s 2 per cent target. This will likely take
some time due to sticky services prices, but we expect gradual
progress in the right direction. We continue to expect the Fed to
keep rates on hold through the duration of 2026, and think a hike
is not justified barring a resumption of conflict in the Middle
East and oil moving sharply higher again.”
Josh Jamner, senior investment strategy analyst,
ClearBridge Investments
“The Warsh Fed kicked off its new chapter today with no change to
interest rates and the announcement of several new task forces –
communications, the balance sheet, data, productivity & jobs,
inflation – as Kevin Warsh leads a broader review of the best way
to deliver on the Fed’s dual mandate of price stability and
maximum employment. Chair Warsh emphasized the committee’s
commitment to delivering price stability repeatedly throughout
the press conference, which the markets have interpreted as
hawkish given the increase in 10-year Treasury yields and
sell-off in equities. The press conference itself ran a typical
length in contrast to the Fed’s statement which was substantially
shorter than in recent years.
“This new shorter statement did not include forward guidance,
which multiple FOMC members indicated was not well suited to the
current juncture according to the chair. The Fed is poised to
provide less guidance to financial markets, likely leading to
increased volatility although Warsh himself pushed back on that
notion during the press conference. Overall, Warsh communicated a
desire to improve and enhance the Fed’s ability deliver on its
mandate by casting a wide lens but keeping the remit narrow.
Investors will ultimately need to stay tuned to see what the task
forces deliver, but one thing is clear now; a new chapter at the
Fed has begun.
Isabel Albarran, investment officer at Trinity
Bridge
“As expected FOMC members left rates unchanged at the meeting,
but the changes to the outlook going forward are notable. The
question on everyone’s lips going into the meeting was – will the
Fed’s updated forecasts indicate hikes rather than cuts and, if
so, how many. Market expectations for future path of US interest
rates have shifted higher over recent months, with one now hike
priced over the next twelve months, where cuts had previously
been forecast. The new forecasts indicates that half of FOMC
members anticipate a hike this year, more than the market likely
expected, with the median rate forecast drifting up to 3.75 per
cent from 3.4 per cent in March and only falling modestly in
2027.
“The statement also dropped wording that suggested further easing
could be on the table. Overall, the market has taken this
decision as a hawkish move, showing that, despite recent
developments between Iran and the US and subsequent fall in oil
price, FOMC members remain concerned about the persistence of
inflation.”
Japan
Colin Finlayson, investment manager at Aegon Asset
Management
”The BoJ raised to 1 per cent, the highest official interest
rates have been in Japan since 1995. Inflation is comfortably
above the average level of the last 25 years and now, with the
rise in energy prices, there are also upside risks to headline
CPI.
“Their government’s expansionary fiscal plans are expected to
bolster economic growth in the coming period, which could add
further fuel to the fire. This made the BoJ’s decision to tighten
policy an easy one and one that is likely to be repeated again in
the second half of the year. Japanese Government bonds have
been relatively friendless for much of the last year and the
BoJ’s action today will do little to change that. For investors
who can invest globally, there are more attractive destinations
to allocate to at this time. Some stability the JGB’s and the Yen
will be needed before the Japanese market is sufficiently
attractive again for global bond investors.”