Investors are scaling back bets on interest rate cuts as fears over stubbornly high inflation on both sides of the Atlantic send shockwaves through financial markets.
In a blow for millions of borrowers hoping for cheaper mortgages in the UK, figures from the Office for National Statistics sparked fears UK pay is rising too fast for the Bank of England to lower rates.
While at the start of the year the central bank was expected to cut rates as many as six times in 2024, it is now thought there could be as few as two reductions.
A separate report in the US showed inflation in the world’s biggest economy is not falling as quickly as anticipated – denting the prospect of early action by the Federal Reserve.
The double-whammy of strong wage growth in the UK and ‘hot’ inflation in the US sent stock markets tumbling.
Sticky: Investors are scaling back bets on interest rate cuts as fears over stubbornly high inflation on both sides of the Atlantic send shockwaves through financial markets
The FTSE 100 index fell 0.8 per cent, or 61.41 points, to 7512.28 – a drop echoed on benchmarks across Europe – with housebuilders among the worst hit following worries that mortgage rates will stay elevated for some time.
In New York, the Dow Jones lost 1.4 per cent, the S&P 500 slid 1.4 per cent, and the Nasdaq dropped by 1.8 per cent.
The ructions spread to the bond markets with the two-year UK gilt yield hitting 4.67 pc for the first time since November and the ten-year topping 4.1 per cent for the first time in more than two months.
The pound rose to a six-month high against the euro of €1.1763 but both currencies fell against a resurgent dollar.
Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance in Charlotte, North Carolina, said the latest figures ‘make you worry that inflation is going to be more sticky than we had hoped and that rates will stay higher for longer’. He added: ‘Inflation staying sticky is everyone’s biggest fear.’
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said: ‘It’s too early to say that inflation has been beaten.’
In the UK, the ONS said wages in the last three months of 2023 were 6.2 per cent higher than a year earlier.
That was the smallest increase for more than a year – but analysts warned it was still too strong to pave the way for rate cuts any time soon.
The Bank of England is worried that pay will continue to rise too quickly for inflation to return to the 2 per cent target having hit a 40-year high of 11.1 per cent in October 2022.
Although inflation has fallen, it ticked up from 3.9 per cent in November to 4 per cent in December in a stark reminder that the job is not yet done. The ONS will today publish inflation figures for January.
Another report from the ONS tomorrow will reveal whether Britain fell into a shallow recession in the second half of 2023 as higher interest rates took their toll.
At the start of this year, investors were betting rates could be cut to 3.75 per cent by Christmas.
But it is now feared rates will fall to just 4.75 per cent or 4.5 per cent this year – with the first move coming as late as September.
With US inflation coming in at 3.1 per cent in January – down from 3.4 per cent in December but higher than the 2.9 per cent expected – analysts also ruled out an early rate cut by the Fed.
