Client Update - 4th November 2022
Market focus returned this week to two major interest rate announcements from the US Federal Reserve (FED) and the Bank of England (BOE). As has become the norm, the rate rises themselves were as expected, each increasing the interest rate by 0.75%, however the rhetoric that followed was eagerly digested and markets moved according to the interpretation of the guidance on offer.
The BOE pushed up the cost of borrowing to 3% in the biggest single interest rate rise since 1989. The UK economy faces a “very challenging outlook”, with a recession that began this summer now expected to last until the middle of 2024. With the possibility of a general election being held in 2024, the Conservatives face campaigning to remain in government at the tail end of a prolonged slump, during which the Bank said it expected unemployment to rise from 3.5% to 6.5%.
However, there was some relief for mortgage holders as the central bank downplayed City expectations of a steep rise in the cost of borrowing to above 5%, arguing that the prospect of a two-year recession meant it was likely to take a much less aggressive stance.
Andrew Bailey, the Bank’s governor, said: “We can’t make promises about future interest rates, but based on where we stand today, we think the bank rate will have to go up by less than currently priced in financial markets.” UK markets have since continued their gradual climb higher. Bailey and his officials expect inflation to fall to zero by 2025, and analysts at Berenberg Bank are forecasting only one more rate rise next month, to 3.5%.
Further evidence to a slowdown in rate rises was seen from the 7-2 split among the nine members of the monetary policy committee (MPC) after Silvana Tenreyro voted for a 0.25% increase and Swati Dhingra voted for a 0.5% jump. Both are professors at the London School of Economics. They argued the full effects of eight consecutive rises should be allowed to feed through into the wider economy before more severe action was taken.
The Bank said it had not factored in any action by Hunt in his autumn statement on 17th November, though the chancellor is expected to announce a package of tax increases that could include a rise in dividend taxation and major spending cuts worth up to £50bn. Rishi Sunak himself announced this week that he would be reviewing key promises made during the summers Conservative party leadership contest, as he argues that such is the change in economic conditions in the last few months, some of his key promises may no longer be deliverable.
On the opposite side of the pond, the US FED gave almost the opposite view as Jerome Powell stated he expects to continue with further rate hikes “until they are sufficiently restrictive” to return inflation to the long-targeted 2% “over time.” Things took a turn toward the hawkish when Powell said the central bank’s benchmark rate was likely to end up “higher than previously expected.” The Fed’s last forecast estimated its benchmark rate would top out in a range of 4.5%-4.75%, therefore estimates have now been increased to 5% at least.
Whichever side of the Atlantic you are watching, we are certainly moving closer to a slowdown and eventual reversal in the rate rises of developed market banks which will in itself create excellent investment opportunities for our portfolios. Do have a good weekend.