The Bank of England joined the ranks of the rate cutters with a narrow 5-4 vote to reduce rates by 0.25% to 4.75%. With headline inflation back at their 2% target level, they chose to look through the sticky services inflation and instead view the collective economic backdrop as one that no longer needs rates at 5%. With it, this brings some welcome relief for both households/mortgage holders and the Gilt market while being less good news for depositors and holders of cash. The focus will now quickly shift to how soon and by how much future cuts will be delivered. Slow and steady is the base case from here.

Moving in the other direction, the Bank of Japan hiked rates to 0.25% - their second increase this year and that takes their official interest rate to its highest level since 2008. While the rest of the major central banks are ending their fight against inflation, the Bank of Japan is finally winning its fight against deflation, with headline CPI at 2.8% compared to an average close to 0% for the last 30 years. In addition, the BoJ set out its plans to halve its bond buying over the next 2 years, as they try once and for all reduce the size of their balance sheet. The resulting move higher in JGB yields - 10yr JGB’s now trade over 1% again – has the potential to see domestic Japanese investors switch out of their offshore bond holdings and return home, something that will of interest to US Treasury market in particular.

Finally, the US Federal Reserve bucked the trend of moving by choosing to keep rates on hold at 5.50%...but not for much longer. With market expectations priced for a first cut in September, this decision came as little surprise and Fed Chair Powell did little to push back on the idea of a cut at their next meeting. The recent progress on inflation - particularly in the Fed’s preferred core PCE measure – and the softening in a range of economic indicators has opened the door to the Fed finally starting its cutting cycle. Given the importance of the US to the global economy and of US Treasuries to the broader bond market, the significance of this move cannot be underestimated. The cuts are expected to be gradual, as the Fed normalises policy in line with the “soft landing” they predict. As a bond investor, the more interesting angle will be what happens if that’s not the case: a sharper economic slowdown would require more aggressive cuts and challenge the outlook for riskier parts of the market, such as high yield; while a more resilient economic backdrop might need less cuts and weigh more heavily on Government bonds…..and that’s before the subject of US politics enters the conversation.

For developed economies, the easing cycle is here, and Central Banks begin the end of the fight against inflation. With this comes lower borrowing costs and all the benefits that brings. While in the land of the rising sun, the direction of rates is very different and reflects different set of economic challenges. I wonder how long it will be before all three of these Central Banks are moving interest rates in the same direction again….?

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