Rate cuts ‘will go ahead’ despite turmoil as US election, UK budget shake markets

Interest rates look set to be cut on both sides of the Atlantic this week despite the uncertainty created by the US budget and presidential election.

The US Federal Reserve will reveal its next monetary policy decision on Thursday, although by then it may still be unclear whether Donald Trump or Kamala Harris have won.

The Bank of England is also expected to cut rates on the same day, although Labor’s budget may mean they go slower than expected in the coming months.

The dollar and Treasury yields fell yesterday as investors responded to polls suggesting Harris could have an advantage.

The decisions of the Federal Reserve and the Bank will be key for millions of borrowers in both countries.

The Federal Reserve’s actions in particular will have repercussions on international financial markets, especially through the dollar and US bonds, known as Treasuries, which are considered the safest asset in the world.

That’s because while both candidates seem set to add trillions to the national debt with a borrowing splurge, it’s Trump’s plans that are more wasteful and therefore more inflationary.

Higher inflation means slower rate cuts. And the fact that rates are higher for longer strengthens the dollar. Until now, markets had been betting that a Trump victory was more likely.

Kenneth Broux, head of currency research at bank Societe Generale, said: “Polls suggesting Harris may have the lead in a couple of swing states are prompting some profit-taking in the Trump business.”

In Britain, markets have changed their bets on when rate cuts will occur as a result of Rachel Reeves’ budget.

The Chancellor’s £162bn overborrowing and associated spending spree are seen as likely to increase inflationary pressures, putting the brakes on the path of rate cuts.

Inflation has been at or around its 2 percent target since the spring and sank to 1.7 percent in September, a three-and-a-half-year low.

Falling inflation allowed the Bank to cut interest rates from 5.25 percent to 5 percent in August, although it remained firm in September. Economists expect a new cut this week.

But after the budget, merchants are no longer betting on a pre-Christmas cut in December, but are instead anticipating the next one in February.