Key points

• The latest economic data support Vanguard’s view that the US Federal Reserve (Fed) is unlikely to cut interest rates in 2024.
• The European Central Bank (ECB) gave its clearest signal yet that an interest-rate cut may be forthcoming at its June meeting.
• In the UK, slowing wage growth and encouraging inflation news could set the stage for interest-rate cuts in the summer.
• China’s economy has made a solid start to the year, but there are still questions about its ability to sustain this level of growth.

Central banks across key developed markets kept interest rates on hold in April, against the backdrop of a surprisingly resilient global economy. However, the path to interest-rate cuts looks set to diverge in the US, euro area and the UK over the course of the year.

United States

The latest economic data support our view that the US central bank, the Federal Reserve (Fed), is unlikely to cut interest rates in 2024 due to the strength of the economy.

The pace of core inflation, which excludes volatile food and energy prices, exceeded expectations in March, increasing 3.8% in the 12 months to March.

The US economy grew by 3.4%, on an annual basis, in the fourth quarter of 2023. We expect growth of around 2% in 2024, higher than our initial estimate of around 0.5%.

The US labour market also remains strong, with 303,000 jobs created in March across the private sector and government agencies, while the unemployment rate fell to 3.8% in March from 3.9% in February.

Euro area

The European Central Bank (ECB) left interest rates on hold at 4% in April but gave its clearest signal yet that an interest-rate cut may be forthcoming at its policy meeting in June, even amid expectations that the US Federal Reserve will keep rates on hold.

ECB President Christine Lagarde emphasised that the ECB would be “data-dependent, not Fed-dependent” in considering the appropriate interest rate.

Economic activity has picked up slightly in the first quarter of 2024, although we continue to expect 2024 growth in a below-trend range of 0.5%–1%.

Headline inflation moderated to 2.4% in the 12 months to March, down from 2.6% in February. However, the monthly rate of inflation continued to rise. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, fell to 2.9% in the 12 months to March from 3.1% in February.

United Kingdom

A continued moderation in wage growth and encouraging inflation news could set the stage for interest-rate cuts in the summer. The Office for National Statistics (ONS) reported that average salary growth, which excludes bonuses, slowed to 6% in the December-to-February period, a sixth consecutive month of moderation.

Headline inflation rose by 3.2% in the 12 months to March 2024, down from 3.4% in February. Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, rose at a 4.2% pace in the 12 months to March, less than February’s 4.5% increase. We expect headline inflation to fall to just below 2% and core inflation to fall to around 2.6% by the end of 2024.

The data support our view that the Bank of England (BOE) will begin a series of interest-rate cuts beginning in August, with the bank rate falling by a percentage point to 4.25% by the end of 2024. The Bank held rates steady at 5.25% in April for the fifth consecutive month.

Latest data also suggest the UK economy is emerging from a brief recession in the second half of 2023. The economy grew by 0.1% in February, having increased by a revised 0.3% in January.

China

China’s economy appears to have made a solid start to 2024, but questions are being asked about its ability to sustain this level of growth beyond the second quarter.

GDP grew by 5.3% in the first quarter year over year, which exceeded expectations compared to the first quarter of 2023, when the economy rebounded strongly after the widespread Covid-19 lockdowns in 2022.

Even as first-quarter growth surprised, March data for industrial production and retail sales slowed.

Inflation also weakened in March after a modest increase in February. We recently lowered our forecast for full-year core inflation to 1% from a range of 1%–1.5%, and for headline inflation to below 1% from a range of 1.5%–2%, well below the central bank’s 3% inflation target.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Important information

Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.

This article is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2024 Vanguard Asset Management Limited. All rights reserved.