What’s next? Central banks’ approach to interest rates diverge
Discover key economic and financial metrics, and what to look out for in the week ahead
2 minutes to read
Here we look at the leading indicators commodities, trade, equities and more. in the world of economics. Download the dashboard for in-depth analysis into commodities, trade, equities and more.
FORK IN THE ROAD
Last week, the US Federal Reserve voted to leave its interest rate unchanged at a target range of 5.00% - 5.25% in June. Some economists project the Fed to keep rates steady through year-end as inflation and labour markets continue to cool. However, downside risks remain that the Fed could implement two additional rate hikes. Meanwhile, the European Central Bank (ECB) lifted its base rate by +25bps to 4.00% in June. Unlike the Fed, the ECB is set to continue its tightening cycle, with the ECB President stating that it is “very likely” the central bank will raise rates again in July. For the UK, the Bank of England (BoE) is widely anticipated to increase its base rate by a further +25bps to 4.75% on Thursday. Beyond that, economist expectations vary on where the base rate will peak, ranging between 5.00% and 5.25%. This lack of consensus also applies to BoE rate cut expectations. Some forecast the BoE to exercise caution and start cutting rates in Q1 2025, while others are more optimistic, anticipating rate cuts in H2 of next year.
DB PENSION SCHEMES, THE £70BN QUESTION
UK FTSE 350 defined benefit (DB) pension schemes currently have a surplus of £69bn, compared to a £51bn surplus at the end of April, according to Mercer. Meanwhile, the aggregate surplus of FTSE 100 companies increased from £59bn at the beginning of 2022 to c.£67bn by the end of the year, which saw scheme funding levels increase from 110% to 120%. According to Pension Protection Fund, of the $1.7 trillion UK DB pension scheme assets, 4.6% or over £70bn is estimated to be in real estate (direct, indirect & REITs). The question then shifts to how much more the DB schemes can invest in real estate, given their funding levels and liability matching requirements. Nonetheless, UK CRE remains an attractive option. When adjusted for inflation, UK All Property total return (+5.29%) over the last 10 years outperformed that of equities (+3.82%), REITs (+2.07%) and gilts (+0.54%).
WHAT UK BUSINESSES REALLY THINK OF AI
One in six UK businesses is currently implementing at least one AI application in its daily operations, according to the ONS. Meanwhile, 35% of companies using or planning to use AI, are doing so to create efficiencies, particularly the professional, science and tech sectors (45%) and ICT (43%). Further adoption of AI is expected, partly due to government backing, with Rishi Sunak announcing that the UK will host a global summit on AI regulation this Autumn. The development in AI adoption could further cement the UK’s position as a top global tech and infrastructure location.
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