Take Two: Fed cuts interest rates; BoJ and BoE remain steady

What do you need to know?

The Federal Reserve (Fed) cut interest rates by 25 basis points (bp) and indicated more reductions could follow to keep unemployment and inflation in check. The anticipated cut marked the first this year and brought borrowing costs down to 4.0%-4.25%, their lowest since November 2022 – in turn helping US stocks hit a fresh high. One policymaker voted for a 50bp cut but Fed Chair Jerome Powell said there was not “widespread support” for such a move. Two further 25bp reductions are expected this year, according to Fed projections. The Fed also raised its US growth forecast to 1.6% for 2025, and 1.8% for 2026, above the 1.4% and 1.6% respectively predicted in June.

Around the world

The Bank of Japan (BoJ) kept interest rates on hold at 0.5% last week, though two of the seven-strong rate setting committee voted in favour of a 25bp hike. New data showed Japan inflation fell to 2.7% in August from 3.1% in July. Meanwhile the Bank of England held interest rates at 4% - with two policymakers voting for a 25bp cut – as inflation remained at 3.8% in August. Elsewhere, Eurozone inflation held steady at 2.0%, revised down from the preliminary estimate of 2.1%, in line with the European Central Bank’s target.

Figure in focus: 5.2%

China announced a new package of stimulus measures to boost sluggish domestic demand, including support for the services and entertainment sector, as new data underlined continued economic weakness. In all, the government announced 19 measures which included, among others, plans to encourage banks to lend more to service providers and consumers, and to hold more sporting events. During August, China’s industrial output expanded by 5.2% on an annual basis, its lowest level in a year and down on July’s 5.7% increase. In addition, retail sales – a major consumption benchmark - grew by 3.4%, their slowest pace since November 2024.

Words of wisdom:

Global Innovation Index: An annual global ranking of innovation across some 139 countries, published by the World Intellectual Property Organization. The rankings are based on around 80 indicators, including research and development, exports, policy and education. This year Switzerland was once again named the global innovation leader for the 15^th consecutive year, followed by Sweden and the US. Separately, Switzerland’s central bank has become one of the world’s largest technology stock investors, according to a Financial Times report. Citing US Securities and Exchange Commission filings, it reported that overall, the Swiss National Bank has some $167bn of US equity investments. 

What’s coming up?

Tuesday sees flash September Purchasing Managers’ Indices (PMIs) covering Australia, the Eurozone, US and UK published. Japan follows with its own PMI numbers on Wednesday, when Germany’s closely watched Ifo Business Climate index is also reported. On Thursday, the US publishes the final estimate of its second quarter (Q2) GDP growth – the previous forecast suggested the US economy grew at an annual rate of 3.3%, significantly up from Q1’s 0.5% contraction. Thursday also sees the BoJ release its latest monetary policy meeting minutes.