Quick Bites | Higher for Longer

The global inflation shock sparked by the COVID-19 pandemic continues to worry markets. But the signs suggest many countries are now gaining confidence that, although they are not necessarily winning every battle, they are winning the war. 

While Europe continues to struggle in terms of economic growth and productivity, the US is clearly outperforming its peers. President Biden’s aggressive industrial policy agenda plus generous pandemic support has been very effective in getting the US economy back on its pre-pandemic track. Ironically, however, strong growth means a slower retreat for inflation, and further delays much-hoped for rate cuts by the US Federal Reserve (Fed). 

Predictions of a US rate cut have been all over the place since the beginning of the year, with economists at Goldman Sachs now forecasting a cut in September amid signs the economy is still too hot for easing. 

Meeting last week in Italy, G-7 finance ministers and central bankers including US Treasury Secretary Janet Yellen analysed the durability of America’s robust growth and low unemployment (and lingering inflation) against Europe’s less-impressive progress. Most of Europe has barely been in positive growth territory for the last few years if one discounts the pandemic effects. 

The eurozone could be the G-7’s first recipient of an interest-rate cut for this cycle next month, a prospect that has provided support for the USD as the Fed sticks with its higher-for-longer policy path.  

In the UK, where a soggy Rishi Sunak announced a 4 July general election, markets are not expecting much in the interim period from the Bank of England.  

Source: Bloomberg