Amidst the hubbub of Ex-President Donald Trump becoming President Elect Donald Trump, the Bank of England announced on Thursday 7^th November that they were cutting interest rates by 25 basis points. This is the second time this year that the MPC (Monetary Policy Committee) has cut interest rates, this time voting by a majority of eight to one. This cut came as data released showed inflation down to 1.7% in September, down from 2.2% in August. However, policymakers were quick to point out that the recent budget presented by Chancellor Reeves, which contained £70 Billion of extra spending (backed by higher taxes), would add 0.5% to headline inflation and 0.75% to GDP (Gross Domestic Product).

The single dissenting voice in the MPC was external economist Catherine Mann who voted for interest rates to be held steady at 5%. This was due to the Bank of England announcing that the increase in the national wage and National Insurance Contributions (NICs) could possibly be responsible for adding inflationary pressure in the form of higher prices and and reduced wages. Policymakers further implied that due to the budget, the cost of borrowing will decrease at a slower rate in 2025.

[A] gradual approach to cutting borrowing costs [is] required

Andrew Bailey, Governor of the Bank of England

Some experts have predicted that the slower pace in cutting interest rates will have a negative impact on many households. The Governor of the Bank of England, Andrew Bailey, in a separate statement cautioned that whilst borrowing cost would still be coming down in the future, the markets should not expect any rapidity in this area. Indeed, with President Elect Trump, who will be firmly ensconced in the White House next January, the Governor went on to say a “gradual approach to cutting borrowing costs was required” as US policies could also encourage inflationary pressure in the world economy.

Analysts now advise that that interest rates will probably not fall below 4% in 2025 .Some experts suggest that borrowers should lock in borrowing costs now with interest rates staying higher for longer, with the added influence of American policy having a negative impact on UK inflation. The Bank of England further announced that they expect inflation to be around 2.5% by close of business December 2024, up from the 1.7% figure in September, adding their oft repeated message that monetary policy would have to stay “restrictive for sufficiently long” to return inflation to 2% on a sustained basis. 

There are many positives in the crypto world at the moment: with Bitcoin recently attaining an all-time high, renewed inflows into Exchange Traded Funds (ETFs) and with market sentiment betting on an ex-president Donald Trump win, especially as he is a crypto convert. Many experts confirm that recently the market has been dominated by the performance of Bitcoin, however, underneath all the confidence, there is a growing concern that some of the once perceived “hot assets” are struggling.

There appears to be a split in the cryptocurrency performances with Bitcoin and Solana up circa 64% since the start of the year and Elon Musk and Memecoin are up a staggering 80%. However, the so-called altcoins* of Algorand, Polkadot, and Polygon all took a beating. Venture Capital deals have yet to recover from the crash that came after the 2021 bull market, with data showing investment in digital-asset start-ups falling by 20% in the third quarter on a quarter-on-quarter basis. 

*Altcoins – These are alternative cryptocurrency to Bitcoin; they are rapidly multiplying and can be subject to extreme volatility.

Elsewhere, crypto exchange Coinbase Inc announced earnings estimates were missed and their rival crypto exchange Kraken has been rumoured to cut the workforce by 15%. DYdX trading announced recently that they will be making redundant in excess of 33% of their workforce and Consensys, whose main business is providing software for the Ethereum Network, has announced they are trimming their workforce by circa 20%.

Consensys and many other associated crypto companies are attributing their current woes to a certain extent to the SEC (US Securities and Exchange Commission) and their lack of clarity surrounding regulations. Interestingly, if elected, Ex-President Donald Trump has announced he will fire the Chairman of the SEC Gary Gensler. One expert recently announced that due to regulatory uncertainty, many large US operators and centralised exchanges will potentially incur higher costs. 

Furthermore, one expert advised that some of the digital-asset companies, due to their technologies, are struggling to generate revenues, which added to the perceived increase in costs may well be behind the recent announcements of workforce cuts. It has also been noted that many blockchains which were being looked upon as alternatives to Bitcoin have gone into decline, again possible due to crypto start-ups not receiving the required investment funds.

There appears to be a disconnect in demand and supply due to the bifurcation or fragmentation in the crypto arena. However, on the positive side, Bitcoin, the on-going poster boy for cryptocurrencies and the crypto market in general, is going from strength to strength. Furthermore, the introduction of Bitcoin-backed Exchange Traded Funds in January 2024 has paved the way for adoption by wall street and a massive inflow of funds. An example of this is BlackRock Inc’s iShares Bitcoin Trust which, on Wednesday 30^th November, saw a record inflow for a single day of USD872 Million. Donald Trump has vowed to turn the United States into the crypto capital of the world, and whilst this is good news for the crypto market, the industry will have to get its underbelly in order.

Traders across the globe are reviewing the path of US interest rates as the possibility of a Trump presidency becomes a reality, which could lead to reflationary policies. October has seen 10 year treasury yields increasing by 0.4% points to 4.2% due to an emerging Trump Trade* and data showing strong economic figures. Since the last rate cut in September, two-year treasury yields also increased by 34 basis points. The Federal Reserve has also recently adopted a more cautious tone over the pace of future interest cuts, especially as data released is showing a more robust US economy.

*Trump Trade – The financial markets regard the Trump Trade as a view that less regulation, lower taxes, less immigration, and higher tariffs could benefit certain sectors and industries, and have important implications for inflation and bond yields.

Experts advise that investors and traders alike are scaling back bets on another interest cut by the FOMC (Federal Open Market Committee) at their next meeting on 6^th/7^th November 2024. Originally market sentiment was in favour of yet another interest rate cut since the Federal Reserve cut interest rates by 0.5% on 18^th September 2024 and were indicating that further interest rate cuts were in the pipeline. However, the recent economic data indicates that there is no need for another interest rate cut of 0.5%, whilst at the same time analysts advise that traders have locked in volatility ahead of the US election and the UK budget.

The big sell-off in US treasury bills has affected both the commodity markets and the currency markets, with the USD Dollar having its best month for 2 years up over 3% against a basket of currencies. In the swaps market, trading experts suggest that there is an increased possibility of the Federal Reserve holding interest rates steady at one of their two upcoming meetings. Furthermore, as the presidential race is now neck and neck, with some polls suggesting a small lead for Trump, this has increased the possibility of tax cuts, tariffs and other policies which will inevitably put upward pressure on bond yields.

Elsewhere in the financial markets some experts have advised that inflation is trending lower, leading to expectations that the Federal Reserve will reduce rates at the next meeting in November. Others suggest that the sell-off, despite the presidential election, will continue to gain momentum whereby the Federal Reserve will continue to cut rates thereby generating an underlying bid for treasuries. However, the combination of election hedging US debt supply may well see an increased volatility in the US Treasury market.

On Thursday 17^th October, The ECB (European Central Bank) cut interest rates by 25 basis points to 3.25%. Analysts advised before the rate cut that financial markets had already factored in a ¼ of 1% interest rate cut as a virtual certainty. Earlier in the day figures from data released showed that headline inflation was below the benchmark target of 2% for the first time since 2021. Interestingly, this was the first back-to-back rate cut for 13 years, with the focus now shifting from bringing inflation down to protecting economic growth. The President of the ECB, Christine Lagarde, has repeated her concerns that there are still risks to growth, but a recession is not on the cards, and confirmed that the Eurozone is still look at a soft landing. 

President Lagarde also was quoted as saying that “Lower confidence could prevent consumption and investment from recovering as fast as expected”, also adding “We believe the disinflationary process is well on track, and all the information we have received in the last five weeks was heading in the same direction – down”. Officials went to say that that the outlook for the Eurozone’s economy was on a downward path, with Executive Board member Isabel Schnabel confirming this position by saying “Officials cannot ignore the headwinds to growth”.

Elsewhere, gold hit an all-time record high of USD2,688.82 per ounce with sentiment being lifted by the uncertain outcome of the US Election next month and financial markets forecasting interest rate cuts in the G7, G20 and other economies around the world. In the United Kingdom, data released showed headline inflation below the benchmark target of 2% for the first time since April 2021. The CPI (consumer price index) dropped to 1.7% down from 2.2% recorder in August of this year, with core inflation (does not include figures from the food and energy sectors) dropping quicker than the financial markets predicted. 

“Services Inflation”, the one sector the Bank of England always keeps an eye (probably the most important indicator of inflationary pressures in the domestic arena), fell to 4.9%. This is the first time since May 2022 that it has been under 5%. Analysts suggest that that these figures will spur the Bank of England into faster rate cuts. Back in Europe, with data and markets predicting that the German economy is set to shrink for the second consecutive year, and experts suggest that the ECB will cut interest rates by another 25 basis points at their meeting in December 2024 if they are serious about getting growth back on track in the Eurozone’s largest economy.

In an interview on 3^rd October 2024, the Governor of the BOE (Bank of England), Andrew Bailey, announced that the Bank could be leaning towards cutting interest rates in a more proactive fashion, providing inflation remained just above the benchmark of 2%. In October 2022, inflation stood at 11.1% due to the energy debacle the United Kingdom faced, but has come down almost to the Bank’s target figure, although the BOE does expect an increase in price growth as energy prices increase throughout the winter months.

Financial markets, after the comments by Governor Bailey, have priced in a 25 basis point interest rate cut to 4.74% at the next meeting of the MPC (Monetary Policy Committee) on Thursday 7^th November 2024. With inflation currently standing at 2.2%, Andrew Bailey said the BOE could become a “bit more activist” in their approach to reducing interest rates providing the news on the pace of price rises continued to be good. The current remarks from Governor Bailey are in contradiction of the “steady as she goes” policy since the first rate cut before the beginning of the Covid-19 pandemic. 

The markets continue to worry about the continuing conflicts in the middle east which could indeed drive the cost of a barrel of oil back up to USD100, which could well push up inflation. Oil prices have risen by 3% on concerns of increasing conflict in the Middle East, however Governor Bailey was quick to point out that a year ago, on the 7th of October 2023, Hamas launched their first attack on Israel there had been no significant rise in oil prices.

On the back of Governor Bailey’s remarks, the appeal of Sterling (British Pound) has slumped as financial markets had originally placed bets on quicker reduction in interest rates. The Governors remarks had a big impact on the financial markets as they were on board with his “steady as you go” policy, suggesting that the BOE would lag behind the Federal Reserve and the ECB (European Central Bank) in cutting interest rates. In fact, traders and investors had piled into bullish bets on sterling, taking advantage of various rate differentials. Data issued by the Commodities Futures Trading Commission show hedge fund wagers at their highest since 2018.

A number of financial experts are suggesting that the pounds best days are over with its rally coming to an end. The pound fell against the US Dollar by 1.1% to 1.3118, the biggest fall since March 2023, and the pound also fell by 1.1% against the Euro the most (on a closing basis) since December 2022. Governor Baileys’ remarks has certainly caught traders by surprise with many selling sterling to close out bullish positions.