Those financial market phenomena represent a loosening of monetary conditions because, in the case of equity markets rising, they increase the level of confidence consumers and companies feel about their wealth and make it easier for them to borrow against their equity holdings.
Bond spreads reducing should mean that credit is becoming cheaper to obtain.
Economic theory would usually say that conditions are not right to cut rates when inflation is proving to be durable, and for this reason Moriarty says she believes “we are in a world of higher-for-longer interest rates”.
But she does feel the BoE has the capacity and desire to cut rates, citing a number of policymakers recently “laying the ground work” for cuts, and she believes the economic data in the UK justifies a cut.
European dreams?
If the US economy and trajectory of monetary policy there is diverging from the rest of the world, the outlook for the Eurozone and the UK may be moving in lockstep, with inflation falling, but persistent, and GDP growth being anaemic.
Those are precisely the conditions that would usually lead to rate cuts, and Abrdn chief economist Paul Diggle still believes the UK can cut rates, but says: “The issue may be around the extent to which it can happen, particularly if the Federal Reserve doesn’t cut at all.”
Vincent McEntegart, who runs the Diversified Monthly Income fund at Aegon Asset Management, has a net short position on sterling, due to his views on the prospects for the economy and the potential for rates to be cut.
He says it would be a “bizarre situation” for the UK to have “base rates at above 4 per cent while the growth rate is zero”.
McEntegart’s net short position is therefore inspired by the idea that rates will be cut in the UK, causing sterling to fall in value.
Diggle adds that it is possible a change of government in the US could lead to a change in the prospects for the dollar, as some of those associated with Donald Trump have spoken of pursuing a policy designed to weaken the value of the dollar in order to boost the manufacturing sectors of the the country’s economy.
The easiest and quickest way to cause the dollar to depreciate is to reduce rates.
While markets are pricing in a similar trajectory for the Eurozone and UK economies, and consequently a similar trajectory when it comes to rates, FP Carmignac Global Bond fund manager Abdelak Adjriou says a divergence could be on the cards here as well.
