For an update on UK and global economic prospects, join me for our annual Back to School webinar on Tuesday, 10 September, at 13:00 BST.

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Each year the world’s leading central bankers gather at Jackson Hole in Wyoming to assess the state of the global economy. For all the caveats that always accompany central bankers’ speeches, the mood at this year’s gathering, two weeks ago, was positive. With inflation falling and recession fears diminishing, a ‘soft landing’ for the global economy looks within reach.

In his speech at Jackson Hole, Jay Powell, the chairman of the US Federal Reserve, signalled that the Fed is primed to cut interest rates. Markets assume that the Fed will reduce US rates at its next meeting on 18 September, the first US rate cut in four and a half years. The US is playing catch up with a number of western central banks, including the European Central Bank and the Bank of England, which have reduced rates in recent months.

Inflation is in retreat with the Fed’s preferred measure for the US at 2.5% and CPI inflation at 2.2% in the euro area and the UK. What has tended to worry central banks more is the persistence of wage pressures and underlying inflation which suggest that economies are running too hot. This is changing. Rates of core inflation stripping out fuel and food have moderated this year and wage growth is weakening in the US and Europe. With inflation close to 2.0% and unemployment edging up wage pressures are likely to continue to ease over the next year.

An ebbing of inflation pressures sets the stage for significant rate cuts. Markets see the Fed cutting US interest rates by around 200bp in the next 12 months to 3.25%. With the UK economy showing unexpected strength in the first half of the year markets expect lesser rate cuts in the UK, of around 120bp, taking the base rate to about 3.75%, over the next 12 months. The expectation that UK rates will stay higher for longer than US rates has led to a strengthening of the pound.

Equity markets have made strong gains since early August’s sell-off bolstered by stronger US economic data and the prospect of rate cuts to come. US equities have more than made up their earlier losses and are up by 9% since 5 August. Gold has also benefitted from the prospect of rate cuts (lower interest rates reduce the opportunity cost of holding gold). Last week the gold price reached a record $2,523 per troy ounce. Boosted by demand from central banks and Chinese investors nervous about the country’s property crisis and slow growth, the gold price has risen by more than 20% this year.

Central banks are signalling that the interest rate cycle has turned. The timing and magnitude of rate moves always depend on the daily flow of data from the economy. If, as seems likely, inflation remains contained interest rates are likely to fall sharply over the next year.