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Leading central banks warned that inflation was proving more persistent than expected and they would only gradually reduce borrowing costs in 2025, in a shift that hit bond markets on both sides of the Atlantic.
A day after Federal Reserve officials backed away from their expectations to cut interest rates, the yield on 10-year US Treasury bonds, the bedrock of global finance, reached its highest levels since May at 4.59 percent. Yields have jumped 0.2 percentage points in just the past two days as investors rush to rethink their expectations for Fed policy over the next 12 months.
Long-term US Treasury yields, which move inversely with the price, typically rise as interest rates and inflation expectations rise.
Yields in the UK also reached 4.66 percent, the highest in more than a year, as Bank of England officials on Thursday warned of an increased risk of “persistent inflation” and kept interest rates unchanged.
Economic inflation The economy is starting to pick up again in both the US and the UK, while uncertainties surrounding the policies of US President-elect Donald Trump are clouding economic prospects around the world.
Andrew Pease, chief investment strategist at Russell Investments, said investors were concerned there would now be a “much slower pace of easing (in monetary policy) until inflation comes down,” describing the “last mile challenges” in the economy. Central banks'The struggle to control prices.
Concerns that rising inflation will slow the pace of interest rate cuts have led to a sell-off in US and UK bond markets in recent weeks, along with concerns that loose fiscal policy will exacerbate the problem.
US stocks also fell on Wednesday after the Federal Reserve cut interest rates but expected smaller rate cuts in 2025 than previously expected. They recovered somewhat on Thursday.
The cautious language from US and UK rate setters contrasts with the message of the European Central Bank, which insisted last week that the “dark days of inflation” are over, leaving the way open for new interest rate cuts.
Investors have reduced their expectations for easing monetary policy in recent weeks. Traders have priced in quarter-point interest rate cuts for the Bank of England next year, from the four cuts priced in October. They priced in one Fed cut next year, with a 50/50 chance of a second cut, while both cuts were expected a month ago.
Even as they cut rates by a quarter of a percentage point, Fed officials said they expected to cut rates by just 0.5 percentage points next year, compared with a forecast three months ago of 1 percentage point. Economists said the central bank's caution was partly due to Trump's potential inflationary policies, pointing to the possibility of tax cuts, increased tariffs and mass deportations.
US inflation readings in September and October were stronger than expected, adding to the arguments for caution. Federal Reserve officials on Wednesday raised their estimates for inflation in 2025, reflecting those concerns.
The Bank of England kept its key interest rate at 4.75 percent on Thursday, with a majority of officials citing high inflation risks even as the bank forecasts zero growth in the final quarter of the year.
The Bank of England said trade policy uncertainty had increased “materially”, referring to Trump's tariff plans, while stressing that the impact on UK inflation would not be clear for some time.
While three members of the nine-member Monetary Policy Committee called for an immediate interest rate cut, the majority preferred to keep interest rates unchanged given the increased “risk of persistent inflation.”
“With increasing uncertainty in the economy, we cannot commit to when or how much we will cut interest rates next year,” Andrew Bailey, Governor of the Bank of England, said in a statement.
