Renewed inflation fears harass central bankers as markets shudder

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Major central banks have warned that inflation is proving more stubborn than expected and that they will only reduce borrowing costs gradually in 2025, in a development that has hit bond markets on both sides of the Atlantic.

A day after Federal Reserve officials lowered their rate cut expectations, the yield on the 10-year U.S. Treasury note, the bedrock of global finance, rose to its highest level since May, at 4.59 percent. The yield has 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 U.S. Treasury yields, which move inversely to prices, generally rise with interest rate and inflation expectations.

British yields also rose to 4.66 percent, the highest in more than a year, as Bank of England officials warned on Thursday of an increased risk of “persistence of inflation” and kept the reference rates unchanged.

Inflation has started to accelerate again in the United States and the United Kingdom, while uncertainties over US President-elect Donald Trump’s policies cloud the economic outlook around the world.

Andrew Pease, chief investment strategist at Russell Investments, said investors were concerned there would now be a “much slower pace of (monetary policy) easing until inflation comes down”, describing the “last mile challenges” in central banks’ struggle to control prices.

Fears that higher inflation will slow the pace of interest rate cuts have led to sell-offs in the U.S. and U.K. bond markets in recent weeks, coupled with fears that loose fiscal policy will make the problem worse.

U.S. stocks also fell Wednesday after the Fed cut interest rates but forecast smaller rate cuts in 2025 than expected. They recovered somewhat on Thursday.

The cautious language from U.S. and British policymakers contrasted with messaging from the European Central Bank, which insisted last week that inflation’s “darkest days” were over, leaving the way open for further declines rate.

Investors have lowered their expectations for policy easing in recent weeks. Traders have forecast two quarter-point rate cuts for the BoE next year, out of four planned in October. They predicted a Fed cut next year, with a 50/50 probability per second, compared to two cuts expected a month ago.

Even though they cut rates by a quarter point, Fed officials said they expect rates to be cut by only 0.5 percentage points next year, compared with a forecast three months earlier. early by one percentage point. The central bank’s caution is partly attributable to Trump’s potentially inflationary policies, economists say, pointing to the prospect of tax cuts, tariff hikes and mass deportations.

US inflation figures for September and October came in higher than expected, strengthening the case for caution. Fed officials on Wednesday raised their estimates for inflation in 2025, reflecting those concerns.

The BoE kept its benchmark rate at 4.75 percent on Thursday, with the majority of its officials signaling higher inflation risks, even as the bank forecast zero growth for the final quarter of the year.

Trade policy uncertainty has increased “significantly”, the BoE said in reference 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 rate cut, the majority favored keeping rates unchanged given the “increased risk of persistent inflation.”

“With increased uncertainty over the economy, we cannot commit to the timing and extent of rate cuts over the coming year,” BoE Governor Andrew Bailey said. , in a press release.