FOMC leaves rates unchanged, Powell leaves potential for rate hike in the future

FOMC decided to leave the interest rate unchanged with Fed funds staying in the 5.25-5.50% range. Such a decision was widely expected but the figures of the economic projections were somewhat surprising and triggered USD strengthening with EURUSD dropping around 0.5% following the decision while the S&P 500 dropped by around 20 points to a fresh daily low as gold dropped around $5 per ounce. While 25 bp of additional tightening is still the median forecast for end-2023, the new forecast for 2024 calls for 50 bp of rate cuts throughout the next year. The most important part of forecasts - dot-plot - showed a hawkish revision with one more 25 bp rate hike being the median consensus for the remainder of 2023, followed by 50 basis points of cuts. Powell also made sure to remain cautious as markets continue to analyse every word from the head of the FED in an attempt to anticipate future decisions.  However, while it seems that some other central banks are having a tough time at appropriately containing inflation, the Fed has generally achieved most of its objectives but must now focus on not undoing all the work. 

What does improved UK Inflation data mean for UK Interest Rate forecasts?

Most economists remain convinced that the Bank of England will still hike UK interest rates from 5.25% to 5.5% in tomorrow's MPC meeting (at 12 noon). That would result in a fifteenth consecutive interest rate hike, with rates at their highest levels since early 2008. There are however now more doubts as to the steps for UK Interest Rates thanks in part to this positive inflation surprise.
UK Inflation continues to see higher prices than most of the rest of the G7, which is a clear and present threat to UK economic growth. So the fact we are now seeing an accelerated cooling of core prices will do much to give the Bank of England pause for thought.
 
The BoE now faces a tough decision; do they continue to hike rates to help maintain this cooling of UK inflation or pause interest rate hikes to see which way the data points in the coming months? There is no easy choice because it’s clear from the data that UK inflation retains some heat.

It remains highly likely that UK Interest rates will rise in tomorrow's MPC meeting to 5.5%. However, we could now see further hikes beyond this totally dependent on how stubborn UK inflation remains in the next three months with the higher likelihood being that 5.5% becomes the new peak for UK interest rates