Inflation and interest rates update: Grain market daily

• UK feed wheat futures (May-24) closed yesterday at £172.70/t, up £0.50/t from Wednesday’s close. The Nov-24 contract gained £0.10/t over the same period, ending the session at £195.30/t.
• European wheat markets have moved relatively sideways as of late due to lacklustre global export demand and strong competition from Black Sea supplies, combined with concerns over new crop conditions in Europe.
• May-24 Paris rapeseed futures were pressured €4.75/t yesterday, closing at €448.25/t. The Nov-24 contract closed yesterday at €454.50/t, also down €4.75/t over the same period.
• European rapeseed prices were pressured yesterday following an increase to the Ukrainian rapeseed production figure. Ukraine’s APK-Inform agriculture consultancy raised its 2024 rapeseed crop estimate by 4% to 4.3 Mt. The consultancy said that the harvest could be down 7% on the year (LSEG).

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With the latest data showing that not only is inflation falling in the UK, but also that the price of some food items including meat actually falling, speculation regarding when and by how much interest rates will start coming down is increasing.

A reduction in interest rates is keenly anticipated by many borrowers. For homeowners, especially those who will be coming off fixed rates in the next 12 months, a reduction will be very welcome. For those with shorter term borrowing such as overdrafts, it will give immediate relief to squeezed finances. The net effect of lower interest rates is to encourage spending and investment within an economy and breath some life into the stagnant growth that the UK is experiencing of late.

The flip side of this is that interest rates are a reward for saving. As they fall, holding sterling becomes less attractive and its value compared to other currencies is likely to fall. This means buying sterling to pay for UK exports becomes cheaper, in effect making our exports more attractive, a boost for all UK exporters. However, it also makes UK imports more expensive which drives inflationary pressures.

In addition, wage growth is still well above the headline rate of inflation at 6%. Wage growth drives business costs which drive inflation, so the Bank of England will be weighing up the pros of cons of a cut at this stage. 

Any reductions are very dependent on external events as well as what is happening within the UK. These external events include the US economy, which has stubbornly high inflation, along with the unrest and potential for escalation in the Middle East. 

With a delicate balancing act to perform, we expect the Bank of England to err on the side of caution and delay any interest rate cuts until Summer 2024 at the earliest.

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