Last week’s ECB (European Central Bank) meeting passed pretty much as predicted with no change in any of its three benchmark interest rates despite mounting evidence of an economic slowdown and falling inflation in continental Europe.

The news was well received in the bond market, which doesn’t like surprises, and expectations for a cut have been pushed out to June.

Beyond that, however, the ECB will likely have to take its lead from the US Federal Reserve, which according to Fidelity global macro economist Anna Stupnystka ‘might have to push back the start of its own cutting cycle to later in the year given continued resilience of the US economy and evidence of inflation persistence’.

The US, like the UK, is experiencing stubborn service-sector inflation driven by wages and hiring, while industrial production and factory orders stagnates.

The Beige Book, which is the Fed’s monthly look at economic conditions across 12 regions mixed picture across regions, suggests growth is slowing, especially on the consumer front, with spending on retail goods dropping as shoppers trade down and shun discretionary goods, while spending on hospitality is also down due to high prices.

Yet still the Fed is concerned about cutting rates too early and allowing the inflation genie out of the bottle again.

Speaking last week, Minneapolis Fed leader Neel Kashkari suggested there was no rush to cut interest rates given how well the US economy seems to be doing, and actually hinted rates may need to rise further, which the markets haven’t priced in.

‘Undertightening will not get us back to 2% in a reasonable time,’ said Kashkari. Adding inflation is ‘ticking up again, that’s what I’m worried about’.

Therefore, we wouldn’t expect any change in US interest rates next week, nor do we expect the Bank of England to move much before the summer, especially as house prices are rising once again suggesting a revival of animal spirits in the property market.

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