John-Paul Coleman, head of markets and treasury at Danske Bank looks at what a potential new interest rates cut could mean for us here
The markets had been quite volatile in the preceding months so the US Federal Reserve meeting in particular was one of most eagerly anticipated and important for some time.
In the end, the Fed opted to cut rates by 50 bps, going further than the market expected, which caused the equity markets and the dollar to weaken before some hawkish commentary from the Fed’s Chair Jerome Powell saw both recover. The market is pricing in two more cuts by the Fed before the end of the year.
The previous week, the European Central Bank made a less surprising 25 bps cut to its base rate, and the market is similarly pricing in two more cuts this year. The Bank of England opted to keep rates on hold, having already lowered rates the previous month, with expectations it will make at least one further cut before the end of the year and further cuts in the first half of next year.
Our customers and other businesses in Northern Ireland who export, import and have foreign currency exposure are watching developments closely to work out how this all impacts them.
So why have banks started to cut rates now? The short answer is that the Fed, and other central banks, are taking action to stay ahead of the curve and avoid an economic slowdown. They believe the battle with inflation is being won, but given the persistence of inflation in recent years, they are still being cautious, so the path to rate cutting is not going to be as even as it was on the way up.
The banks are no doubt mindful of the crisis in the 1970s which saw central banks ease rates too soon because they believed the battle on inflation had been won.
To reduce risk on the way down, central banks are also reducing their quantitative tightening – the process of reducing the amount of money in circulation – which is taking liquidity out of the financial markets. We can therefore expect that there will be times of volatility because even though rates have been high, there is less liquidity in the market.
Against this backdrop there is some positivity about the UK. The economy has performed a little better, with GDP rising by 0.5% in quarter one, which has balanced concerns that inflation might be more sticky in the UK than in Europe and the US and as a consequence rates will not fall as quickly.
For business and consumers, longer term rates are getting back to the lows we last saw in December 2023, which will have a positive impact on the cost of borrowing. Given the uncertain path ahead, businesses should consider if there is value in locking in these rates. We have observed businesses being very active in the last couple of weeks to do this.
Similarly, the pound has been very strong against the dollar and euro and is expected to remain so in the short term, but with risk around volatility, it may make sense for some businesses to lock in current levels to protect their income.
The big unknown for market prospects is the impact of the US Presidential Elections. While common wisdom says a Trump win will mean a stronger US dollar and a Harris win more neutral, the direction will very much depend on the policies the winner chooses to implement.