As inflation continues to ease, there’s a growing feeling in financial markets and among economists that interest rate rises could finally be nearing an end. 

America’s central bank the US Federal Reserve (Fed) held interest rates steady at its most recent meeting. But with renewed strength in the economy, those rates may need to stay higher for longer to tame inflation.

The Bank of England (BoE) also left interest rates unchanged at 5.25% – the first pause since November 2021. The decision followed UK inflation dropping from 6.8% for the year to July to 6.7% for the year to August.

While this is all very encouraging, the BoE and Fed remain cautious, both stressing we’re not out of the woods yet and further hikes may be necessary. 

Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the NatWest Invest funds, says this is only to be expected.

“Central banks don’t want to be calling victory too early and there’s uncertainty about the level at which inflation will stabilise,” he says.

“In periods where rate rises could be coming to an end but it’s by no means definite, there tends to be increased market uncertainty. There’s still some concern that more rate hikes may be necessary if inflation picks back up. After all, you only know it’s the last hike a while after it’s happened.”

The US economy shows signs of strengthening, with shoppers still spending and inflation still falling, while there’s growing activity globally too.

Historically, such conditions have been positive for stock markets. There is still a risk of a recession in the US, which would hit markets worldwide. But the Coutts team’s own recession indicator shows the chances of one easing a little since February. A stabilising manufacturing sector in America even suggests the country may avoid a severe downturn.

Given this backdrop, the experts at Coutts have been positioning their investments towards new opportunities. For example, they sold some of their US government bond holdings and increased their stake in UK corporate debt, which currently offers better income.

Oil prices have surged to their highest level in more than a year, raising fears inflation could rise again. Brent crude soared to over $97 a barrel and some analysts are predicting it could even breach $100.

The spike comes after two of the world’s biggest oil producers, Russia and Saudi Arabia, announced they would extend their voluntary production cuts until the end of the year.

Lilian says it shouldn’t cause too much of an issue for the fight against inflation though.

He says, “While the rise in the oil price is not going to help inflation, in order for it to have any impact on prices it will have to remain elevated above $100 a barrel for some time.”

Why is oil important for investors?

The price of oil is a critical barometer for investors worldwide, driving major movements in the global economy and stock markets. As a core commodity, the price of oil impacts the profitability of many industries and individual companies.

Oil prices affect everything from airlines and automakers to plastic producers and shipping companies. Even small fluctuations in crude prices can have an oversized impact across industries.